The Labour party has unveiled its proposals for reform of the leasehold sector. Their title “Ending the Scandal – Labour’s New Deal for Leaseholders” gives a clue as to the direction of travel they are consulting around. They summarise their proposals as follows:
1. To end the sale of new houses on a leasehold basis straight away and the sale of flats in this way by the end of their first term.
2. To ban ground rents for new leasehold homes and cap those for existing leaseholders at 0.1% of the property value up to a maximum of £250 a year.
3. To set a “simple formula” for leaseholders to buy out the freehold of their home (or Commonhold in the case of a flat) capped at 1% of property value.
4. To “crack down on unfair fees and contract terms” by publishing a reference list of reasonable charges requiring transparency on service charges and giving leaseholders a right of challenge regarding fees, conditions and performance of those providing management services.
5. To give residents greater powers over the management of their home including new rights for flat owners to form Residents Associations and by simplifying the existing Right to Manage.
So what detail have they supplied around these proposals and how does this compare to the government’s position?
The government first announced proposals in this area in December 2017. It asked the Law Commission to add this and other leasehold reform issues to its 13th program for review and to consult around its recommendations before finalising them. Those recommendations have recently been received and the Government has finalised it’s proposals with this.
Further proposals can be expected when the Law Commission reports back from it’s other consultations i.e. on Leasehold Reform, Commonhold and the Right to Manage.
The Law Commission’s 13th program already included a number of other issues for consideration:
- unfair terms in leases
- service charges
- the right of first refusal
- lease administration fees
- energy efficiency, and
- the consolidation/streamlining of leasehold legislation
Selling Houses on a Leasehold Basis
The government proposes a ban in this regard subject to certain exemptions that is to come into effect immediately on the relevant legislation being commenced. Enforcement measures enable those wrongly granted leasehold interest to upgrade to freehold at no cost and civil penalties for breach with enhanced penalties for repeat offenders.
Labour also propose banning house sales on a leasehold basis however at this stage there is no detail around any exclusions and enforcement.
Sale of Flats on a Leasehold Basis
The government has tasked the Law Commission to “propose reforms to reinvigorate Commonhold as a workable alternative to leasehold for both existing and new homes”. It has reviewed the existing legislation and put forward proposals for consultation which has now been closed. This included asking whether banning the sale of flats on a leasehold basis was necessary to reinvigorate Commonhold and a potential proposal to reduce the participation level required to convert to commonhold. It’s recommendation and the government response are awaited.
By contrast, Llabour propose making Commonhold mandatory in time as above and to lower the participation level required for existing flats to convert to Commonhold.
Both propose to reform Commonhold and it may be that both propose to make its use compulsory.
The government proposes banning ground rent in effect in new leases but allowing existing ground rents to continue without amendment. There are some exemptions from their ban i.e. for community led housing schemes (where ground rent may be the scheme’s only source of income and so support its other activities), retirement properties, mixed use leases (so those letting a building that comprises both residential and commercial elements) and for certain home reversion plans.
Labour will also ban ground rents on new leasehold sales. By contrast they also propose capping the rents payable under existing lease contracts at 0.1% of property value up to £250. So this will have a negative effect on the value of landlord’s’ property interests and so will transfer wealth to tenants holding residential property on a long lease.
Fixing the price payable to acquiring the Landlord’s Interest as a percentage of freehold value
The government has tasked the Law Commission with a review of enfranchisement legislation with the objective of examining the options to reduce the premium payable on enfranchisement and to make enfranchisement easier, quicker and more cost effective besides:
- promoting transparency and fairness in the residential leasehold sector
- providing a better deal for leaseholders as consumers
- simplifying the legislation
- considering the case for improving access to enfranchisement rights
The Law Commission’s consultation paper from September 2018 referenced government estimates that there are 4.2 million leasehold properties in England comprising 18% of all housing stock which breaks out to 2.2 million that are owner occupied and 1.8 million in the buy to let sector (so about 43% of the piece). The social rented sector is relatively small at 0.2 million. Other estimates indicate a greater number of leasehold owners i.e. 6.6 million estimated by Leasehold Knowledge Partnership.
The Law Commission’s consultation document considers this option. That shows the premium cap being broadly half of the current premium payable using Labour’s valuation percentage (for a flat of the same value with a longer remaining term and the same ground rent as the example flat used by Labour). Their example shows that the effect is even stronger for flats with less than 80 years remaining as for the same flat on a 60 year remaining term the premium cap would create a saving of at least £24,000. So a very large redistribution of wealth would follow if Labour’s proposals were implemented.
As the Law Commission’s consultation paper says “landlords come in all shapes and sizes: primary estates (for example The Grosvenor Estate and Cadogan Estate), charities (for example National Trust), developers, pension and other funds, private individuals, investors and leaseholder-owned companies. From their point of view they have investments which have been “expropriated from them compulsorily”. For the leaseholder owned companies a group of flat owners may lose out to another as when they bought the freehold under the existing legislation they would have paid a premium in respect of non-participants’ flats who would then be entitled to come along and acquire that interest from them much more cheaply.
Labour propose enabling long leaseholders to buy their freehold interest (Commonhold for a flat) at a price that is capped at 1% of the freehold property value. They give as an example that the premium payable to the landlord would reduce from £6,000 to £2,000 to extend the lease of a flat in respect of a £200,000 property held on a lease with 90 years left to go at a rent of £250 per annum.
They describe as unsatisfactory the alternative to “tweak the existing basis on which leaseholders can buy the freehold to their home”.
In the case of pension fund landlord the proposals would mean pensioners’ assets being transferred in 43% of cases to buy to let investors based on the government’s above statistics.
Management Quality and Fees
The government has confirmed in its response to consultation that it will introduce service charge protection for freeholders of houses on estates and cap fees payable by leaseholders for management information needed on sale and stipulate the timing for provision of that essential information.
In addition there is already a plethora of existing legislation around the reasonableness of service charge enabling leaseholders to challenge reasonableness and entitling them to be consulted with regard to certain major works and long term contracts. Administration charges are subject to control also.
Against the background Llabour say they will “crack down on unfair fees and contract terms by publishing a reference list of reasonable charges requiring transparency on service charges and giving leaseholders an improved system to challenge rip off fees and conditions or poor performance from service companies”.
In 2006 the Law Commission recommended that the current law of forfeiture be abolished and replaced with an entirely new statutory scheme following consultation. A draft bill was annexed to their report. The proposed scheme includes a like ability for the court to order sale and the proceeds distributed as it specified amongst other remedies.
The government has recently asked the Law Commission to update their work in this area.
Labour’s proposal is similar to that proposed by the Law Commission; they propose replacing landlord’s’ ability to forfeit a lease with an ability to obtain relief from court where a serious breach of obligations by the flat or house owner has proven detrimental to the value of the property with the ability to force a sale where this is proven. The leaseholder would then receive their portion of the sale proceeds where they would lose out entirely under forfeiture.
Granting Residents Greater Management Control
The Right To Manage has been in existence since 2002 and is subject to review by the Law Commission currently; the consultation has run its course and their recommendations are awaited which, if adopted, will significantly increase the availability of the right and simplify its exercise. So the right would be extended to leaseholders of houses and a single let flat in a building, those whose buildings contain a large non-residential element such as shops on the ground floor along with those buildings where currently too few flats are let on long leases (the threshold is to reduce from two-thirds to one half).
The government has published a consultation on recognition of president’s associations and potentially obliging landlords to provide them with necessary information about leaseholders.
Against that Labour’s proposals are to enable recognised tenants associations to obtain information about spending each year, to enable them to seek the appointment of a new property manager without proving fault (so akin to flat owners exercising the right to manage collectively that already exists) and to close loopholes such as landlords withholding contact details of residents being the subject of the above consultation.
They also want to simplify the right to manage based on the Law Commission’s work which matches the government’s terms of reference.
Labour’s proposals share some similarities such as the proposal to end the sale of houses on a leasehold basis albeit with less detail at this stage.
They go further in some areas namely adjusting ground rents and existing lease contracts so as to redistribute wealth from landlords to their tenants which may be from a pension company to a buy to let investor in practice.
Other proposals may well match the government’s position once it has the benefit of the relevant reports from the Law Commission i.e. banning the sale of flats on a leasehold basis, expanding the right to manage and the price payable for the landlord’s interest when a tenant acquires their freehold or a lease extension.
The most significant changes may prove to be the proposed ban on sale of flats on a leasehold basis replacing that with Commonhold if that is not matched.
Mark Vinall, Partner at Winckworth Sherwood