Jen Hicks-Jones, Partner in our commercial property team, looks at plans to overhaul the system for long-leaseholders.
The Government has taken the first important steps towards making it cheaper and easier for many residential long-leaseholders to purchase the freehold interest in their premises.
The unjust treatment of long-leaseholders, with high service charge fees and minimal control over their investments, has been a hot topic in recent years.
Most people will have seen stories of people who are living in homes that are unmortgagable or unsellable because of factors such as short leases, extortionate service charges, or rising ground rent clauses. Legislation is on the way to ban ground rents on new homes, but service charges remain a thorny issue. There are examples where service charges – which fund a building’s running costs – have more than doubled and are even on par with mortgage repayments.
The Government and The Department for Levelling Up, Housing and Communities, has vowed to "make it easier and cheaper for leaseholders to buy their homes". This is very welcome news indeed for the army of 4.5 million leaseholders, the majority of which live in flats and new build homes.
The current leasehold system dates back to the Norman Conquest when all land in England belonged to the King who granted barons permission to build on, live on or rent it out to peasant farmers. The system has been roundly criticised as “inconsistent, unnecessarily complex and inherently unjust”, prompting the Law Commission in 2018 to begin looking at ways to reset the balance the power.
In one of the biggest shake-ups of residential property law in 40 years, earlier this month The Department for Levelling Up, Housing and Communities published a consultation paper on its reforms to the process of enfranchisement – that is, the rights of certain tenants to extend their leases, manage common areas or buy the freehold.
The proposals in the consultation paper include:
- increasing the non-residential threshold from 25% to 50%, which would mean that tenants in buildings with up to 50% non-residential floor space would be entitled to acquire the freehold or exercise a right to manage;
- the introduction of mandatory leasebacks as part of collective freehold acquisitions, i.e. requiring landlords to take leases back on non-participating units following completion of a freehold purchase by tenants;
- introducing a 50% non-residential limit for “individual freehold acquisitions” – i.e. acquisitions by individual residential tenants of their freehold premises, provided not more than 50% is used for non-residential purposes; and
- making changes to the voting rights for right-to-manage companies.
The paper also addresses changes to legislation dealing with commonhold, where buildings are jointly controlled by the owners of the flats inside them who work together on managing the communal areas via an association. It considers how shared ownership fits into commonhold developments, and the details that should be provided on the sale of a commonhold unit.
The consultation closes on February 22nd 2022.
It is clear that the Government intends to press ahead with the reform of enfranchisement legislation for the benefit of long-leaseholders following several high-profile cases where those affected have complained of being unjustly treated.
The proposals will, if turned into law, make it easier for residential long-leaseholders to purchase the freehold interest in their premises, or to take over control of building management from landlords. If they go ahead, the landscape will be quite different to where we currently are.
Long-leaseholders will be encouraged by an introduction on the consultation paper which states the Government “agrees in principle that these proposals would fulfil our stated aims to broaden access to enfranchisement and the right to manage and reinvigorate commonhold as a future tenure”.
A review of long-leasehold ownership remains a key focus for the Government, as it also published a separate plan in January this year to reset its approach to building safety and to protect leaseholders from hefty costs for cladding repairs, by passing these costs onto developers and contractors.
There is a lot of work still to be done, however – and those affected want the changes written in law as soon as possible. The Law Commission’s report extends to hundreds of pages and covers several aspects of law, all of which will need to be resolved.
It will be interesting to see the outcome of the enfranchisement consultation and we will continue to monitor and report on any legislative changes.
