What next for home ownership?

Introduction: Kerry Glanville

Anna Favre’s opening piece in our recent series on The Future of Leasehold, which outlines the Law Commission’s proposals for the reform of enfranchisement, commonhold and right to manage could not have been more prescient or timely.

On 7 January 2021, the Minister for Housing, Communities and Local Government announced the first stage of what is described as “the biggest reforms to English property law for 40 years”.  It is intended to fulfil the government’s commitment to making home ownership fairer and more secure.

We have produced an e-book of four articles from our award-winning leasehold enfranchisement team.  The topics we have covered are shown at the bottom of this page.  You can also read and share these in our downloadable e-book.

During the course of this Parliament, legislation will be brought forward which will include the right for leaseholders of houses to extend the lease of their house to 990 years at a ground rent of zero.  Currently they have the opportunity to make only one claim to extend the term to 50 years at a market rent.  Leaseholders of flats will be able to extend their lease to 990 years at zero ground rent whereas they are only able to extend, at present, by 90 years at a zero ground rent although they may make multiple claims.  Legislation will be laid before Parliament during the current session to reduce ground rents to zero.

Whilst our leasehold reform e-guidance (below) does not seek to address, specifically, the options set out in the Law Commission’s report published in January 2020 to reduce the price payable by leaseholders wishing to enfranchise, it is to be noted that the reforms will introduce an online calculator.  This will enable leaseholders to find out how much it will cost them to buy their freehold or extend their lease.  It will be based on predetermined rates for various elements of the calculation with a view to making the cost “fairer, cheaper and more transparent”. 

Marriage value will not be payable but discounts for improvements made by leaseholders and discounts where leaseholders have the right to remain in the property on the basis of an assured tenancy once the lease has expired will be retained.  It will also be possible for leaseholders to agree, voluntarily, to a restriction on the future development of their property in return for which they will not have to pay for any “development value” that would otherwise be due.

Underlining the Government’s intention to hasten the complete demise of leasehold as a form of tenure, it has been announced that a Commonhold Council is to be established to promote the widespread take up of commonhold as the preferred form of home ownership.  It is envisaged that the Council will comprise a partnership of representative of leasehold groups, industry and government.

We will, of course, be monitoring the details which will set out in forthcoming draft bills and providing an insight on the implications.

If you have queries now that you would like to talk through with us, please do call and our team will be happy to help.

Our leasehold reform series

The reform of leasehold home ownership is at the forefront of the political agenda and the Law Commission has recently recommended wholesale changes which will transform the residential landscape.   Anna Favre considers the drivers behind the need for reform and why commonhold is advanced as a solution.  

 

Anyone with even a passing interest in home ownership will know that housing policy forms a key feature of the political agenda.  Government scrutiny has recently centred on leasehold ownership of property and the perceived injustices in the landlord and leaseholder relationship.  This led to the government’s 2017 Housing White Paper entitled Fixing our broken housing market, swiftly followed by a consultation paper on Tackling unfair practices in the Leasehold market.  Then, in 2018 the government asked the Law Commission to carry out a wholesale review of three key areas: leasehold enfranchisement, commonhold and right to manage.

 

The Law Commission’s terms of reference (reflecting the underlying policy objectives) were to promote transparency and fairness in the residential sector and to provide a better deal for leaseholders as consumers.  Central to this remit was reinvigorating the much vaunted but seldom exercised form of flat ownership known as commonhold; introduced under the Commonhold and Leasehold Reform Act 2002, it combines freehold tenure of property with shared ownership of common areas and services. 

 

The concept of freehold and leasehold is unique to English law.  Freehold ownership is not time limited and generally gives extensive control of the land.  In contrast, leasehold provides a fixed period of ownership of a property, the use and control of which is shared with the freeholder. By its nature a lease is a wasting asset, losing value as it grows shorter while the cost of extending it becomes exponentially greater. 

 

Criticism of the use of leasehold ownership intensified following the widely reported ‘leasehold houses scandal’ concerning new build properties principally located in the north of England, although the same issues arise nationwide.  Obligations to pay high ground rents to freeholders, in some cases doubling every 10 years, weighty administration charges and commensurate falls in the value of leaseholders’ property left many unable to meet their financial obligations and unable to sell or mortgage their homes.  This led to a growing sense of injustice and a perception that external investors holding a stake in a person’s home (as a source of income) created imbalance and unfairness. The case for reform and an appraisal of alternative forms of ownership was set in motion. 

 

In July 2020 the Law Commission published its recommendations on the reform of all three areas of law.  They  include, significantly, proposals for a ‘fit for purpose’ commonhold which could render leasehold ownership obsolete..  In an ambitious statement, the Law Commission’s Nick Hopkins urged the government “to ensure that commonhold becomes the primary model of ownership of flats in England and Wales”.  If the government adopts these recommendations, as is anticipated, homeownership as currently understood will change radically.

 

Commonhold is fundamentally different from leasehold.  Analogous to the Australian ‘strata’ system, commonhold provides indefinite freehold ownership of property with shared ownership of common areas and services.  There is no concept of a flat but instead the land is divided into units, whether commercial or residential, and managed jointly by each unit owner as a member of a commonhold association.  The commonhold association must keep to the rules of a commonhold community statement (the CCS) which defines the physical extent of each unit and the common parts, fixes the amount of each owner’s contribution to maintenance costs and sets out the duties and obligations of each owner.  It is perceived as conferring on property owners greater control of their property, regulating the affairs of a group whose interests are broadly aligned.  This is in contrast to what the government considers the competing interests of landlord and leaseholder. 

 

Despite its much lauded introduction in 2002, commonhold has not been readily adopted.  Fewer than 20 commonholds have been created since the legislation was introduced, principally, it is thought, because of its unworkability in practice.  Low uptake by mortgage lenders and developers, a lack of consumer awareness and a general reluctance to change the leasehold status quo are also considered to have been contributing factors.

 

In a bid to address these deficiencies and reinvigorate commonhold as a workable leasehold alternative, the Law Commission report contains over 120 proposals for its reform.  These include protecting the interests of lenders, facilitating easier conversion from leasehold to commonhold, and improving the clarity and flexibility of the CCS.  Detailed consideration is also given to enforcement of the CCS and dispute resolution –  a tacit acknowledgment perhaps of the human capacity to fall out with one’s neighbours, irrespective of how a home is owned. 

 

The Law Commission makes a compelling case for the adoption of commonhold as an alternative form of tenure.  It remains to be seen what path the government will now take but it is clear in its objective to make commonhold a viable mechanism for home ownership.  The biggest hurdle may be persuading land owners to embrace the change. Legislative change will probably be required to ensure its objectives are met.   

In this article, Kerry Glanville considers whether the recommendations  made for the determination of disputes and the recovery of costs in the proposed reforms meet the Government’s stated aim for the process of exercising those rights to be simpler, quicker and cheaper for leaseholders.

 

One tribunal to handle all disputes

This key proposal aims to remove the confusion caused by the current system that gives jurisdiction to both the First Tier Tribunal and the County Court.

It is envisaged that, with one exception, all enfranchisement issues and disputes shall be dealt with by the First-tier Tribunal under an extended range of powers, including:

  • powers to deal with the proposed new categories of applications, e.g. for lease extensions on non-statutory terms or by landlords to prevent leaseholders from serving further enfranchisement claims, and
  • powers currently only exercised by the County Court, to allow execution of a lease extension or transfer by a Tribunal judge in place of a party; giving it access to the Court Funds Office so that it can receive the premium or price payable; and enabling it to order the discharge of any contract between the parties where the contract price has not been paid by a specified date.

 

The exception that remains with the County Court is the power to enforce the terms of a contract for a transfer or lease extension by making an order for specific performance.

 

‘Alternative track’ for valuation disputes

The second proposal is to have a simpler ‘alternative track’ to which the Tribunal can refer pure valuation disputes for determination by a single valuer without a hearing.  

Before referring a dispute to the alternative track, the Tribunal will consider the value of the claim, the difference between the parties’ positions and the proportionality of conducting a full hearing.  If a claim appears suitable for the alternative track but a party can show that it has a broader significance, e.g. to claims involving other flats in a block, the Tribunal may order a full hearing but the party seeking the hearing must pay the other party’s additional costs.

Having a single forum for dealing with enfranchisement disputes and issues will simplify the process, and reduce the confusion, delay and additional costs that can arise under the current system.  Undoubtedly, the Tribunal has the necessary expertise to deal with applications, and offers good and efficient case management.

Under the proposed new regime, it will have a bigger role in determining claims and there are likely to be more of them. If the reforms are to succeed, the Tribunal will need to be properly resourced to enable it to carry the benefits it currently offers into its increased role.

Costs

Whilst gaining much substantive power from the County Court, the Tribunal will not have the same powers when it comes to determining which party should pay the costs.

The Commission has made alternative proposals about the right to recover costs. Which of these will apply is contingent upon the valuation methodology the Government decides to adopt.

If the valuation method adopted means leaseholders have to pay a market value based price for a lease extension or freehold, they will not normally have to pay anything towards their landlord’s non-litigation costs.

The Commission’s rationale is that this approach is comparable to what happens in an open market transaction where the buyer is not expected to meet any of the seller’s costs and this is reflected in the higher price that is paid; to impose a liability to pay costs in addition to the market price would over-compensate the seller/landlord.  The Commission did not accept the consultee landlords’ argument that making a claim is a unilateral and voluntary act, akin to compulsory purchase, given that the lease is a wasting asset and that there are various drivers (for example the ability to obtain a mortgage) that increase the pressure on leaseholder to make claims.

There are two exceptions to this proposal:

  • low value claims – it is suggested that the Government should fix a contribution threshold, the “prescribed sum” (£1,000 is used in the examples in the report). If the premium payable to the landlord is below the prescribed sum but his costs are higher than the premium, the leaseholder will pay an amount equal to the lower of the landlord’s costs or the prescribed sum.
  • where a leaseholder makes an election which has the effect of reducing the price payable but causes the landlord to incur additional costs (such as an election requiring the landlord to take leasebacks of some parts of the premises), the landlord will be entitled to recover a fixed contribution to those costs.

 

If the valuation methodology does not reflect the open market value of the property, leaseholders will have to pay the landlord’s non-litigation costs according to a fixed costs regime which will apply to all types of enfranchisement claim.

The landlord would recover a prescribed “base sum” plus, in the case of a collective freehold acquisition claim, prescribed sums in respect of any further costs incurred for dealing with each prescribed additional element of the claim (such as an election requiring leasebacks).  Either the additional sums, or the total sum to be paid, should be capped.

The Law Commission’s considers that it would be inappropriate for the Tribunal to have the same wide powers to order one party to pay the other’s litigation costs, as the County Court does now, save in exceptional circumstances arising from the parties’ behavior.

Accordingly, the Tribunal’s existing power to order one side to pay the other’s costs on account of unreasonable behaviour is preserved.  

There is a list of further specific exceptions to the general rule arising in some of  the proposed new types of application.  Notably, any costs payable to the landlord will be fixed, but where the landlord may be liable for the leaseholder’s costs, they will not be fixed or capped.

Summary

The Commission certainly appears to have fulfilled the Government’s brief to make the enfranchisement process cheaper for leaseholders.  In most cases landlords will be unable to recover any of their costs, whether or not the process has involved litigation, and even in the limited circumstances where leaseholders have to contribute to those costs, this is likely to fall far short of the landlords’ actual costs. The proposals also give leaseholders a greater degree of certainty about the overall expense of making a claim, which is likely to be broadly welcomed.

Amy Jackson looks at how the Law Commission proposes to reform the qualification criteria for tenants looking to buy their freehold or extend their lease and the potential ramifications for both landlords and homeowners.

 

This article summarises the main changes the Law Commission proposes to the eligibility criteria for leaseholders looking to extend their lease or acquire their freehold, both collectively of a block of flats, or individually of a house.  The principle aim is to allow more leaseholders to take advantage of the legislation by relaxing the criteria and removing obstacles and creating a regime that is simplified and unified.  This will, however, have an impact on landlords and developers who have, until now, sought to protect themselves from the risk of enfranchisement.

 

Importantly, the Law Commission proposes to no longer distinguish between houses and flats, and to introduce the concept of a ‘residential unit’.  A qualifying lease must still have been originally granted for at least 21 years.

 

Lease extensions

Under the current regime, leaseholders of houses and flats enjoy different rights to a lease extension.  A leaseholder of a flat is entitled to a 90 year extension added to their existing term, whereas a leaseholder of a house is (whilst seldom sought) only entitled to an additional 50 years.  In both cases, the leaseholder must have been the registered owner of their lease for at least 2 years before being able to make a claim.  The terms of the new lease will be the same as the existing lease, save that the rent will be reduced to a peppercorn and the term will be extended. 

Proposals for all ‘residential units’:

  • Abolish the two year ownership rule, allowing any leaseholder to apply for a lease extension, instead of waiting until they have owned their property for two years when the premium will have likely increased.  
  • 990 year extension. The landlord will retain the ability to take back the property on the grounds of re-development in the last 5 years of every 90 year period, subject to certain requirements.
  • New right for leaseholders with very long leases to buy out their ground rent, without having to extend their lease.
  • New right for leaseholders with onerous ground rents to extend their lease term, without having to buy out their rent.

 

Collective freehold acquisition of blocks of flats

Currently, leaseholders of blocks of flats have the right to collectively acquire the freehold interest in their building, as well as any intermediate leasehold interests.  There are currently stringent conditions that the leaseholders, and the building, must hurdles.   

Proposals:

  • Raise the limit of permitted non-residential use from 25% to 50%, drastically increasing the number of buildings which qualify, particularly impacting landlords of mixed-use premises.
  • New ‘multi-building’ regime permitting leaseholders of more than one building to make a claim together provided each building would qualify of its own accord.  
  • Remove the restriction of owning more than two flats in a building as a bar to being a qualifying leaseholder.
  • Abolish the resident landlord exemption.

 

Individual freehold acquisition of houses

The right for an individual to acquire the freehold of their house is overly complex.  The qualification criteria is archaic and the information required to instigate a claim can be difficult to obtain.  Unbelievably, the definition of what is a ‘house’ is still unclear.

Proposals:

  • New ‘residential unit’ concept will avoid the ambiguity of applying the definition of a ‘house’.
  • Abolish the two year ownership rule.
  • Abolish all qualifying criteria based on financial limits, such as the low rent test and rateable values, except where the existing law protected leaseholders and preserves low premiums.

 

The Law Commission has produced a flow chart ( see page 395 here) which aims to help leaseholders understand if they qualify for any form of enfranchisement right.   The reforms will certainly achieve its aim of applying more widely to leaseholders and would simplify the qualification process.  It will, unquestionably, also have an impact on landlords who may receive more claims and therefore an increased income through premiums, but will also be at risk of losing their interest in the buildings they had otherwise structured to retain. 

Michael Roskell looks at how the Law Commission proposes to make Right to Manage claims available to a wider variety of buildings and tenants and the process easier and cheaper to pursue.

Following consultation in July 2020, the Commission has recommended changes to the right to manage (“RTM”) regime.  The Commission hopes to reduce costs, simplify the procedure and make RTM available to more leaseholders in a wider variety of buildings.

This article looks at the current legislation and recommended changes.

Qualifying Premises

Currently RTM is restricted to a self-contained set of premises with no more than 25% non-residential space and containing at least two flats. The focus on the physical structure of the building causes disputes and the limit on non-residential floor area excludes many mixed use developments. 

Instead consider if the building is capable of independent management even if it is not self-contained.  The non-residential limit is increased to 50%. There need only be one residential unit so leasehold houses are included. 

Qualifying Leases

Shared ownership leases will now qualify. Business tenancies and leases which prohibit residential use will continue to be excluded but not so mixed use properties with a genuine residential purpose such as live/work units. There may be issues of proof in this area. 

The exclusion regarding resident landlords and buildings split between different freeholders will be abolished.

Multiple buildings

Currently tenants cannot manage multiple buildings through a single RTM company.

The Commission recommends that any combination of buildings be claimed through a single RTM company provided each individual building qualifies and that a building not originally included in a multi-building RTM be able to join later.

The RTM Company

At present only one RTM company at one time can exist for a building. Landlords may establish sham RTM companies to frustrate a future claim. 

The Commission recommends abolishing this rule. To promote tenant participation, directors will be required to hold an AGM where currently they need not do so. If leaseholders lack sufficient knowledge to run a management company, free training is recommended by the Commission.

Acquisition process

Currently, a notice inviting participation must be sent to all qualifying tenants before the claim notice is served.  The Commission recommends this be abolished and also that all RTM notices can be signed electronically.  The service process will be easier. 

Information rights and management contracts.

Leaseholders lack sufficient information so the Commission recommends that RTM companies should be entitled to any information reasonably required and that landlords must notify material changes.

Timings of communications about management contracts will be tightened up.

Insurance

The Commission concludes it is not appropriate that reinstatement obligations be acquired by an RTM but rather that the RTM and the landlord should work together to procure suitable insurance cover in joint names.  Whether this is likely to work remains to be seen.

Shared property

The Commission concludes that RTM companies should not automatically acquire management functions over property shared with other buildings which are not part of the RTM claim but can do so if the landlord does not object.  But what if the other tenants object?    What redress do they have against the RTM for failure of management?

Uncommitted service charges

Currently, there is no deadline by which landlords must hand over any accrued service charge fund nor is the landlord required to chase arrears. The Commission recommends changes to address these shortfalls. 

Management costs.

The Commission recommends that RTM companies be permitted to recover management costs.

Lease consents

Currently, there is delay and uncertainty as to who is responsible for what.  The Commission recommends that landlords should only have the right to receive notice of approvals relating to assignment, underletting, charging, parting with possession, making structural alterations or improvements and alterations of use.  Deadlines to deal with these will be clarified. Additionally,  landlords should not charge administration fees for giving consents and RTM companies should not be entitled to give retrospective consents in respect of absolute covenants.

Costs and dispute resolution

The Commission recommends that RTM companies should no longer have to pay landlords’ costs unless the RTM fails and the tenants have behaved unreasonably.  Any terms in the lease which purport to enable the landlord to recover costs would be unenforceable.

Termination of an RTM

The Commission recommends that an RTM company should be able to apply to the tribunal if it wishes to give up the RTM.  Management functions will revert to whoever is responsible for them under any lease or failing that to the landlord.

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