The Law Commission of England and Wales has today [21 July 2020] published recommendations to transform home ownership for millions of people in England and Wales. It has been estimated there are at least 4.3 million leasehold homes in England alone. If enacted our reforms would help those owners and pave the way for a system where flats are sold with freehold title (as part of a commonhold).
These reforms – laid out in three reports – work in tandem with planned changes from the Government to create fit-for-purpose home ownership across England and Wales. The Commission’s reforms will lay the foundations for future home ownership to be freehold and tackle some key issues that existing leaseholders currently face.
This would be done by:
- Reinvigorating commonhold – which allows people to own a flat forever, with a freehold title and no landlord – as an option to replace leasehold for newly-built flats. Recommended reforms would also give leaseholders a route out of leasehold by making it easier to convert to commonhold.
- Improving the current system for existing leaseholders by:
- Improving the process by which leaseholders can buy the freehold or extend their lease (“enfranchisement”). Our recommendations would create an improved enfranchisement regime that would be simpler and cheaper for leaseholders in flats and houses.
Making it easier and cheaper for leaseholders to take over the management of their building without buying the freehold, by exercising the right to manage (“RTM”). The RTM lets leaseholders take control of services, repairs, maintenance, improvements, and insurance.
During our projects we have heard from leaseholders about a wide range of problems they have experienced with the current law. Our terms of reference are focused on specific areas of the law and on their own cannot tackle every issue that leaseholders face. But they would combine with work from the Government (for example banning the use of leasehold for most houses) to make home ownership fit-for-purpose.
Professor Nick Hopkins, Commissioner for property law said:
“The leasehold system is not working for millions of homeowners in England and Wales. We have heard how the current law leaves them feeling like they don’t truly own their home.
“Our reforms will make a real difference by giving leaseholders greater control over their homes, offering a cheaper and easier route out of leasehold, and establishing commonhold as the preferred alternative system. The reforms will provide a better deal for leaseholders and make our homes work for us, and not somebody else.”
Luke Hall, Minister for Rough Sleeping and Housing, said:
“This Government is determined to improve transparency and fairness in the residential leasehold market to help thousands of leasehold homeowners up and down the country as well as future homebuyers.
“We are clear that the current system needs reform, which is why we asked the Law Commission to carry out this important work. We will carefully consider the Law Commission’s recommendations, which are a significant milestone in our reform programme, as we create a better deal for homeowners.”
Julie James MS, Minister for Housing and Local Government:
“These comprehensive and much anticipated reports mark a significant step towards much needed reform. It is clear that the current leasehold system often fails resident leaseholders and these reports will give us a better understanding of the issues involved; we now need to take the time to consider them carefully.
“The Law Commission have undertaken a mammoth task in unpicking the current law, engaging widely on the options for change, and putting forward comprehensive recommendations and I’m grateful to them for their excellent work.”
Further details on each area of reform is below, whilst details on Government reforms can be found in the attached summary.
Recommendations in each report
In our enfranchisement report, we are recommending changes to make the scheme of enfranchisement rights work more smoothly and efficiently, whilst also introducing reforms that shift the balance of power in favour of leaseholders. Key recommendations include:
- Transforming the scope of enfranchisement so more leaseholders can benefit from a route out of leasehold:
- buildings with up to 50% non-residential space would qualify (rather than 25%, as is currently the case)
- leaseholders would be able to make a claim straightaway, rather than having to wait for two years
- the price to purchase a block would be reduced by allowing leaseholders to compel landlords to take “leasebacks” of some flats
- leaseholders would be able to buy the freehold of multiple buildings at once (for example, several buildings on an estate) rather than having to do it block-by-block.
- Creating a new right to a lease extension for leaseholders of both houses and flats, for a term of 990 years, in place of shorter extensions of 90 or 50 years under the current law. There would be no ongoing ground rent under the extended lease. We also recommend that leaseholders who already have a very long lease should be able to buy out the ground rent without extending their lease.
- Protecting leaseholders from procedural traps and ensuring they cannot be forced to accept new obligations to make unnecessary or unreasonable ongoing payments.
- Eliminating or controlling leaseholders’ liability to pay their landlord’s costs. At the moment, leaseholders are required to pay their landlord’s uncapped costs, which can equal or exceed the enfranchisement price.
Right to Manage report
In our Right to Manage (RTM) report, we have made a number of recommendations that are designed to reform the RTM regime to the benefit of leaseholders, by making the process cheaper and more attainable for leaseholders. Our recommendations include:
- Removing the existing obligation on leaseholders to pay the landlord’s costs of the RTM process, including of any Tribunal action. This will give leaseholders more control over costs, and make the process more affordable and predictable.
- Relaxing the qualifying criteria, so that leasehold houses, and buildings with up to 50% non-residential space, can qualify for the RTM, and so that leaseholders can claim the RTM over more than one building at a time (for example, several buildings on an estate).
- Making the RTM claims process easier by reducing the number of notices that leaseholders must serve, and giving the Tribunal the power to waive minor procedural mistakes in the process.
- Improving the information and training available to RTM companies and their directors, so that leaseholders can make more informed decisions about the RTM and prepare for an effective and efficient handover of management responsibilities.
In our commonhold report we have made a number of recommendations that would make commonhold not just a workable alternative to residential leasehold for all involved, but the preferred alternative. The recommendations include:
- Making it much simpler, quicker and cheaper for existing leaseholders to convert from leasehold to commonhold by:
- placing leaseholders in control of the conversion process
- preventing those who are opposed and who currently have a veto from wrecking the process
- enabling conversion to commonhold without the agreement of every person, with safeguards to protect those who have not agreed.
- Introducing flexibility into the way commonholds can be built and managed, enabling their use for developments of all types and sizes – moving away from a “one size fits all” approach that makes the current scheme too inflexible for many developments.
- Creating a robust regime for financing commonholds:
- giving owners a greater say on setting the commonhold costs,
- requiring a fund for future repairs, so enabling major works to be budgeted for,
- providing greater certainty to lenders that their interests will be protected.
- Improving the day-to-day operation of commonholds, enhancing the experience of the homeowners living within them. For example, ensuring that commonholds are kept in good repair and are properly insured.
Allowing shared ownership leases to be granted in commonholds, ensuring that as many people as possible are able to access commonhold ownership.
These reforms would overcome the legal problems with commonhold that are undermining its use.
Our recommendations provide the blueprint for a workable commonhold regime, but cannot on their own lead to its widespread adoption. It is now for Government to decide whether it should be compulsory (in all or some circumstances), incentivised, or left optional.
Further detail on all three sets of recommendations can be found in the attached summary.
The Law Commission
The Law Commission is a non-political independent body, set up by Parliament in 1965 to keep all the law of England and Wales under review, and to recommend reform where it is needed.
Q. What problems will your reforms address?
The recommendations that we make in our three reports will make it easier, quicker and cheaper for leaseholders to take control of their homes, by making significant improvements to the right to manage, enfranchisement rights and commonhold.
Together with wider proposals from Government, our recommendations will help leaseholders to escape problems which are not new, but which have become high-profile in recent years.
Ultimately, our recommendations solve the problems leaseholders experience by enabling flats to be owned freehold through commonhold.
Q. Why has the Law Commission not solved ground rents?
Our projects are governed by Terms of Reference. It was not within the scope of our project to review ground rents in general. However, where ground rent issues arise within the scope of our projects, we do remove ground rent obligations.
Under our recommendations, all claims to buy the freehold or extend a lease will result in the existing ground rent being removed.
In our Valuation Report (January 2020), we presented Government with an option for reform that would allow leaseholders with onerous ground rents to enfranchise – and so remove the ground rent– without having to pay the landlord anything in so far as the ground rent was onerous.
In commonhold, there is no ground rent.
Q. Why has the Law Commission not abolished leasehold?
The scope of the Law Commission’s projects is set out in terms of reference, which are available here. Those terms of reference do not allow a consideration of whether leasehold should be abolished, which is a matter for Government.
We have, however, examined in detail the commonhold regime, which allows homeowners – in particular those who own flats – to reap the benefits of freehold ownership. Government has already announced its plans for a general ban on leasehold houses. Our reform of commonhold means that freehold ownership can become the preferred means of owning not just houses, but also flats in the future.
Q. What is commonhold?
Commonhold is freehold ownership, which is how most houses are owned. It is a way of owning property (in particular flats, but any properties that are interdependent) that solves the problems of leasehold ownership. There is no landlord, no ground rent and no lease to expire.
Commonholds are managed along democratic lines. They move those who manage and occupy them away from an ‘us and them’ mindset – which is the starting point for leasehold – towards ‘us and ourselves’.
Commonhold-type structures are successfully used around the world, where leasehold is generally not regarded as a suitable form of property ownership.
Q. How does reforming commonhold help current leaseholders?
Our recommendations make it easier for existing properties, for example, blocks of flats, to convert to commonhold. There will no longer be a requirement for everybody to consent to the conversion.
Our recommended improvements to the enfranchisement regime will make it easier and enable more people to buy their landlord’s freehold, and set up a commonhold.
Q. Why hasn’t commonhold taken off?
There are several reasons, including inertia in the market, and a leasehold system that is being used by developers to generate an ongoing income stream. In addition, there were technical difficulties and inflexibility in the original commonhold regime.
The Law Commission’s recommendations address the technical difficulties and provide the flexibility for commonhold to flourish and to work in modern developments.
Government will be considering the steps necessary to re-invigorate commonhold. Commonhold will not take off unless Government decides to make it mandatory or to incentivise commonhold over leasehold.
Q. The enfranchisement recommendations sound technical, why is enfranchisement important?
Enfranchisement allows leaseholders to extend their lease or escape leasehold by buying the freehold. The recommended reforms make enfranchisement available to more people. The reforms would significantly improve the extension right to provide a 990-year lease, which would place the vast majority of a home’s value in the hands of the leaseholder.
The reforms also make the process easier and cheaper to navigate, for example, recommendations to eliminate or control the requirement to cover landlord’s costs, which can exceed the amount that is paid for the enfranchisement.
Q. Why do we need to change the enfranchisement regime if commonhold is the future?
Leases will be around for a long time. Even if, when our commonhold reforms are in place, the Government followed up a ban on leasehold houses with a ban on using leasehold for flats, there would still be many millions of leasehold properties in existence.
It is vital that leasehold homeowners can benefit from enfranchisement rights that are fair, efficient and fit-for-purpose.
Also, enfranchisement is a route to commonhold. Where, for example, a block of flats is owned by a third-party landlord, the leaseholders will be able to use their enfranchisement rights to acquire the landlord’s interest and convert the property to commonhold.
Q. Why would leaseholders claim the right to manage (“RTM”) instead of buying the freehold?
The RTM allows leaseholders to take over management of their building, and therefore control of service charges, without buying the freehold.
In most cases, we expect that leaseholders would prefer to buy the freehold if they have the funds to do so.
However, leaseholders may choose to exercise RTM in cases where:
They do not have the funds to purchase the freehold; or
The property does not qualify for collective freehold acquisition but the RTM is available
Our recommendations will make the process of claiming the RTM easier and cheaper, which may make the RTM a more attractive interim step before taking the more expensive and irreversible step of buying the freehold.
Q. Why are the reports so long?
The law is complex and the reports are blueprints for the detailed legislation that will be required to make our recommended changes into law. We have prepared a number of summary documents to help leaseholders and practitioners understand the recommendations we have made. They will be available on our website: https://www.lawcom.gov.uk/project/residential-leasehold-and-commonhold/
Q. Are your recommendations the result of consultation.
The Law Commission’s recommendations are built on extensive consultation. Each of our reports was preceded by public consultation following publication of a Consultation Paper. We organised events across England and Wales to give all of those who would be affected by our recommendations the chance to speak, including those who will most benefit from our recommendations – residential leaseholders.
We also created a survey for leaseholders, to go alongside our formal consultation paper, to give leaseholders the best chance to share their experiences and have their say.
We received thousands of responses to the consultation papers and surveys across all three projects.
In finalising our recommendations, we have carefully considered all of the comments that we received and weighed the arguments that were made.