On 21 July 2021 the Law Commission published its key proposals on leasehold reform and the future of home ownership.
The three reports which deal with enfranchisement, right to manage and commonhold tie in with the Government's aim to address problems with leasehold ownership. It is encouraging to see the issues addressed in such a cohesive way. The proposals set out ways to make the process of enfranchisement easier and cheaper. They suggest reforms to the right to manage legislation and they encourage the use of commonhold as a viable alternative to leasehold ownership.
The proposals are extensive, particularly on the issue of commonhold. It remains to be seen if they have gone far enough to reinvigorate a system that so far has only been used 20 times in the UK since it was introduced in 2002. The issue of home ownership is high on the political agenda and these proposals will certainly provide the Government with plenty of food for thought.
The Commission began its work on enfranchisement reform when it published its consultation paper in September 2018, provoking a significant number of responses. The report makes over a hundred recommendations, many of which are far reaching and, if enacted, will fundamentally change the enfranchisement sector.
Currently there are two different schemes in force; the Leasehold Reform Act 1967 which applies to houses and the Leasehold Reform Housing and Urban Development Act applying to flats. It is proposed that these will be replaced by a unified qualification scheme based on a "residential unit".
There will also be a single unified procedure adopted for all enfranchisement claims with provisions that relax the strict time limits imposed under the current system. The two years ownership requirement will also be abolished. The proposals also eliminate or control the leaseholder's liability to pay the landlord's costs.
The new regime provides that if a leaseholder has a long lease (over 21 years) of a residential unit he/she will be entitled to a 990 years lease extension at a peppercorn rent on payment of a premium. This is a significant increase from the current 90 years. In an attempt to tackle onerous ground rent they propose a cap on the level of ground rent taken into account when assessing the premium at 0.1% of the freehold value. A leaseholder will also be able to extend without buying out the ground rent or conversely buy out the ground rent without extending the term.
- The new regime includes three rights to acquire the freehold:
- The right to acquire the freehold of the building in the ownership of a single long leaseholder.
- The right to collective freehold acquisition if there are (i) two or more residential units in the building (ii) two thirds of the residential units are held on long leases and (iii) at least half participate in the claim.
There is an additional right for leaseholders of residential units on estates to acquire the freehold of the whole estate.
Restrictions on enfranchisement
There are also changes to the restrictions on enfranchisement. One of the most radical departures from the existing regime is the increase in the limit on mixed use buildings which is raised from 25% to 50% non-residential use. This means that many more mixed-use buildings will qualify. The restriction preventing tenants with more than two flats in a building from qualifying will also be removed.
For leaseholders who are not able to enfranchise there are recommendations which make RTM more widely available, reduce the cost of making a claim and which simplify the process thus reducing the scope for mistakes.
In terms of qualification, the key changes involve a similar move towards the concept of a "residential unit" and an increase in the non-residential limit from 25% - 50%. Again, this will lead to significantly more claims being made in mixed-use buildings. Further relaxation of the rules means that buildings will qualify if they are a building or part of a building that is reasonably capable of being managed independently.
There are similar changes to the procedure. They propose the removal of the requirement to pay the landlord's costs of an RTM Claim or the cost of tribunal proceedings unless the RTM company acted unreasonably. It is recommended that the Tribunal be given exclusive jurisdiction to deal with RTM claims being largely a non-cost jurisdiction.
Combined with the changes to leasehold are proposals to re-invigorate the Commonhold system of ownership. This is a system where each person owns the freehold of their unit, which could be a flat or a house. The unit owner becomes a member of the Commonhold Association that owns and manages the common parts of the block or estate. The Commonhold Community Statement sets out the boundaries of the common parts and the rights and obligations of the unit owners and the Association. The intention is that there is no landlord in charge, instead the unit owners run the block or estate for themselves.
The proposals intend to make it easier for leaseholders to convert to commonhold and for developers to create sites that, once completed, are owned under a commonhold system. One reason why commonhold has never caught on has been the refusal by many lenders to accept the transfer of a mortgage to a commonhold title. It is proposed that the Government will work with lenders to overcome this. Although far reaching it does appear that further work may need to be done to find viable solutions to the issue of non-participants.
The proposed reforms will be welcomed by leaseholders. If all three areas of reform are implemented together with the proposals relating to valuation there could be a seismic shift towards a fairer system of home ownership. Much will depend on whether the impetus for change continues and the reforms are enacted. On average it takes over five years for a programme of reform to become legislation and the Government already has the added complications of Brexit and Coronavirus to contend with. It is, however, high on the Governments Agenda and even with some significant lobbying from landlords it seems that ultimately a change in the current system is inevitable.
Natasha Rees, Partner and Head of Property Litigation at Forsters