The Department for Levelling Up, Housing and Communities is seeking views on the reform of the residential leasehold and commonhold system in England and Wales (the “Consultation”). If implemented, the proposals would significantly widen access for residential leaseholders to purchase the freehold of their building and/or take on management responsibilities.
The Consultation focuses on the arguably more substantive elements of the Government’s comprehensive leasehold reform programme, which has recently seen the Leasehold Reform (Ground Rent) Bill – which will significantly reduce ground rent for future leases – pass its third reading through the House of Commons.
This brief note focuses on the leasehold of flats, as opposed to houses.
Additionally, if you wish to read further on the commonhold system, please refer to the sources listed below.
What proposals does the Consultation focus on?
The leasehold element of the Consultation has two strands:
- Enfranchisement (both as an individual and as a collective); and
- The right to manage.
Current and future legislative plans would see a leaseholder awarded the right to extend their lease for a term of 990 years (this being significant increase from the current 90 years). Financially speaking, although the leaseholder must pay a premium for the lease extension, the ground rent from the date of the extension grant will be set at a peppercorn, thereby benefitting those paying onerous ground rent. Notwithstanding the extension, landlords will retain the right to resume possession for redevelopment purposes both during the last 12 months of the original lease and the last 5 years of the lease extension.
The Leasehold Reform, Housing and Urban Development Act 1993 allows leaseholders in a single building to collectively acquire the freehold. The acquisition of the freehold takes place via a “nominee purchaser”, which currently can either be a natural or a corporate entity. The statutory criteria to make an enfranchisement claim require the interested leaseholders to hold at least 50% of the total number of flats in the building. Under current legislation, the building itself must devote more than 75% of its floorspace to residential purposes. Where an enfranchisement claim is successful, the landlord must be compensated for the loss of their interest as well as for their reasonable costs for considering the claim. The landlord has the option to acquire ‘leasebacks’ of the non-residential and/or non-participatory units in the building for a term of 999 years at a peppercorn rent. The value of the leasebacks is deducted from the premium payable for the enfranchisement, thereby constituting a significantly reduction in cost for the leaseholders.
The right to manage
The right to manage is a relatively new right deriving from the Commonhold and Leasehold Reform Act 2002. It grants leaseholders the right to take responsibility, through a company, for the management of the building, ie by arranging repairs for common parts and obtaining building insurance. In this scenario, the freehold does not change hands and the current landlord retains ownership.
The statutory criteria require two-thirds of the total number of the flats to be held by ‘qualifying’ leaseholders (those with residential leases of at least 21 years). Additionally, at least 75% of the building’s floorspace must be residential. It has been noted that the process of acquiring the RTM is procedurally cumbersome, costly, and is often abandoned by leaseholders. Indeed, the Court of Appeal has surmised that the process “contains traps for the unwary.” To give a flavour of these traps, leaseholders’ claims can be foiled by: legislation providing that the leaseholders pay the landlord’s costs; seemingly small administrative errors derailing the entire process; difficulties ascertaining the names and addresses of all necessary leaseholders; and not meeting the necessary residential floorspace threshold.
What proposals are being consulted on?
The UK and Welsh governments have considered the recommendations made by the Law Commission in 2019 and agree the proposals would meet the objective of tackling the leasehold “nightmare of crippling ground rents, extra fees, and onerous conditions.”
Amongst other changes, the proposals aim to widen the availability for leaseholders to own the freehold and/or have greater control of the property by, amongst others:
- Raising the non-residential floorspace limit from 25% to 50% for collective acquisitions and right to manage claims;
- Increasing the scope for mandatory leasebacks to landlords as part of the collective enfranchisement process (as to reduce the premium payable and ensure affordability);
- Introducing a non-residential limit of 50% for individual freehold acquisitions (this will allow flats above a shop where both leases are held by the same party to make a claim);
- Legislating that the starting point for any lease extension should be the same terms as the original lease (excluding the term and ground rent provisions); and
- Amending voting rights in right to manage companies to cap the landlord’s voting rights at one-third of total votes (to ensure leaseholder control while maintaining involvement from the landlord).
What are the next steps?
Those interested in responding to the Consultation and feeding into the legislative process can do so online or by email before 11:45pm 22 February 2022. It is expected that the Bill informed by the Consultation will be introduced to Parliament sometime before 2024.