Law Commission sets out proposals for eventual abolition of leasehold home ownership

After years of consultation, the Law Commission has today (21 July 2020) published three reports on leasehold enfranchisement, right to manage and commonhold, each outlining a comprehensive programme of reforms aimed at ending unfair practices in the leasehold market. The reports are intended to supplement the Law Commission's previous report on valuation in enfranchisement published in January 2020.

Promoting "transparency and fairness in the residential leasehold sector" and providing "a better deal for leaseholders as consumers", the focus of the reports is to improve the leasehold system until a time where it is no longer needed and commonhold is commonplace. If the Law Commission's recommendations are accepted, new laws will enable leaseholders to gain more control over their properties, with significant consequences for developers and ground rent investors.

Commonhold: a different way of thinking

The vast majority of flats are sold on a leasehold basis. However, there are pitfalls. Leases are time limited and the value of a lease tends to reduce over time. A leaseholder also has less control over its property than freehold owners. For example, a leaseholder may not be able to make alterations to their home without landlord's permission.

"Commonhold" is an alternative and relatively new form of property ownership. First introduced in 2002, it enables homeowners who live in a block of flats or development to own the freehold to their flat and to participate in the ownership and management of shared spaces. However, it has not proved popular and less than 20 commonholds have been created since the legislation came into force.

Mortgage lenders are reluctant to lend against commonhold units and consumers are still unfamiliar with it as a form of ownership. To address this, the Law Commission proposes to:

• make it easier for existing groups of leaseholders to convert their building to a commonhold;
• allow commonholds to be used by developers on complex developments by creating sections that allow for commonholds to be built in phases and to cater for different needs;
• allow shared ownership leases and affordable housing to be included in commonhold;
• make commonholds more financially secure and change the way they are run so the properties are kept in good repair and properly insured;
• change the rules of commonhold and how costs are shared – every commonhold would have a set of rules governing the rights and obligations of the commonhold association and the unit owners. There would be no requirement to pay service charge, instead the commonhold association would demand "commonhold contributions" to cover shared costs with any minority interests being protected;
• empower the commonhold with sufficient enforcement powers and a new unique dispute resolution process; and
• protect a lender's position in the unlikely event that a commonhold association is wound up.

Leasehold enfranchisement

Enfranchisement is a statutory right for long leaseholders to purchase the freehold of the property or to extend their lease. Collective enfranchisement enables leaseholders of neighbouring flats to join together to buy the freehold of their block. However, the process can be complex, expensive and often considered unfair with unexpected fees, procedural traps and costly delays.

The Law Commission's starting point is that commonhold is the preferred mechanism for delivering home ownership and long residential leases are not required once introduced. Until such time as commonhold is workable and replaces leasehold the Law Commission proposals are intended to address concerns "that the balance of power in existing leases, legislation and public policy is too heavily weighted against leaseholders" and to make enfranchisement easier, quicker and cheaper by:

• introducing a "brand-new reformed enfranchisement regime" giving rights for leaseholders of flats and houses to obtain a 990-year lease at zero ground rent, replacing the current regime where leaseholders of flats are granted a 90-year leases and 50-year leases are granted for houses;
• giving leaseholders the ability to "buy out" existing ground rent under their leases without having to extend the lease;
• simplifying the enfranchisement process and creating a new concept of "residential unit" to refer to houses and to flats and the removal of the separate rules for both to create a single process;
• widening the scope of leaseholders who can qualify for the rights – abolishing the two-year ownership requirement enabling leaseholders to enfranchise immediately and increasing the non-residential rule from 25% to 50%;
• allowing groups of flat owners to be able to acquire multiple buildings (such as an estate) in one claim, rather than incurring the expense of acquiring each building individually;
• requiring landlords to take “leasebacks” of units within the building that are not let to leaseholders participating in the claim, in order to significantly reduce the price that leaseholders must pay;
• abolishing or controlling the requirement for leaseholders to pay their landlord's costs of a claim; and
• allowing enfranchisement disputes to be determined (wherever possible) in the Tribunal, replacing the current practice of claims progressing within the Tribunal and the county court.

Right to manage

The right to manage (RTM) gives leaseholders the right to take over the management of their building without buying the freehold. With the aim of improving accessibility to this right and simplifying the process, the Law Commission announced today proposals which include:

• removing the requirement for leaseholders to pay the landlord's costs of the RTM claim;
• relaxing the qualifying criteria so that the RTM can be claimed in respect of a wider range of buildings, for example buildings with up to 50% commercial space;
• permitting leaseholders to acquire the RTM over multiple buildings/an estate;
• reducing the number of notices that leaseholders must serve and giving the Tribunal the power to waive procedural mistakes in claim notices;
• publishing clearer rules for the management of property, such as shared gardens and carparks, and training for RTM company directors and members; and
• the right for the RTM company to request information about the premises from a much earlier stage to facilitate a smoother handover of management functions.

Other areas of improvement

The Law Commission acknowledges that the shift away from leasehold to freehold ownership will take time. As a result, the Law Commission recognises that the current leasehold system needs to be improved now for the benefit of leaseholders. In addition to the proposals regarding improving enfranchisement and RTM, the Law Commission supports the government measures around:

• the abolition of forfeiture;
• a government-backed pledge designed to help leaseholders with onerous ground rent terms;
• the regulation of property agents;
• better regulation of charges levied by landlords, such as service charges or consent fees;
• tightening the rights of first refusal under the Landlord and Tenant Act 1987 and extending its reach to houses as well as flats; and
• banning the sale of leasehold houses.

The future of leasehold ownership

The reports try to force a cultural shift away from leasehold home ownership. The Law Commission acknowledges that leasehold will not end overnight, but in the future commonhold will be preferred to leasehold. The report concludes that commonhold will not be used unless it is compulsory or adequate incentives are in place to make it preferable to leasehold.

The baton is now passed to the government to see which of these recommendations will be implemented, and whether leaseholders and developers will embrace these reforms to emancipate homeowners to manage their own shared buildings.

These reforms look set to change the way that property is owned, operated and used more comprehensively than at any time since the implementation of property law reforms in the early 1920s.