The Law Commission has unveiled a package of reforms that would transform the future of home ownership in England and Wales – including making commonhold the preferred alternative to leasehold.
The proposals also include making it easier and cheaper for existing leasehold homeowners to buy their freehold or extend their lease through enfranchisement, and to take control of management of their estate or block of flats.
However, the most dramatic reforms would reinvigorate the oft-derided system of commonhold for new homes, to ensure that it takes off in England and Wales, just as it has around the world.
According to the Law Commission, there are at least 4.3m leasehold homes in England alone. It said: “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).”
The reforms – laid out in three reports, following an extensive consultation process that began in 2018 – work in tandem with planned changes from the government to create fit-for-purpose home ownership across England and Wales. The proposals “will lay the foundations for future home ownership to be freehold and tackle some key issues that existing leaseholders currently face”.
‘Leasehold system is not working’
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.”
He added: “The Law Commission’s reforms are about making our homes ours, rather than someone else’s asset. Once we have commonhold in a way that works, we do not need long residential leases.”
Julie James, minister for housing and local government, said: “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 has undertaken a mammoth task in unpicking the current law, engaging widely on the options for change, and putting forward comprehensive recommendations.”
The Law Commission’s aims would be achieved 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 enfranchisement process – making it simpler and cheaper for leaseholders to buy the freehold or extend their lease.
- Improving the right to manage – making it easier and cheaper for leaseholders to take over the management of their building without buying the freehold.
According to the Law Commission, there are several reasons why, although similar structures are used successfully around the world, commonhold has not been embraced here – including inertia in the market, technical difficulties and inflexibility in the original commonhold regime, and “a leasehold system that is being used by developers to generate an ongoing income stream”.
It said that its recommendations address the technical difficulties and “provide the flexibility for commonhold to flourish and to work in modern developments”.
However, it added that commonhold will not take off without government support.
It said: “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.”
The reforms set out in the Law Commission’s three reports – together with its earlier recommendations on the calculation of enfranchisement premiums – will now be considered by the government, which will decide if any will be taken forward.
What is commonhold?
The Law Commission describes commonhold as freehold ownership, with 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”. It says that commonhold-type structures are used successfully around the world, where leasehold is generally not regarded as a suitable form of property ownership.
LISTEN: Law commissioner Nick Hopkins on the Law Commission’s proposed reforms
Property law commissioner Nick Hopkins speaks with EG’s Jess Harrold, outlining the Law Commission’s extensive proposals for the future of home ownership in England and Wales.
The enfranchisement report
The Law Commission recommends changes to make the scheme of enfranchisement rights work more smoothly and efficiently, while 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. 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.
The right to manage report
Recommendations include:
- Removing the existing obligation on leaseholders to pay the landlord’s costs of the RTM process, including any tribunal action.
- 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.
- 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 and prepare for an effective and efficient handover of management responsibilities.
The commonhold report
Recommendations to make commonhold the preferred alternative to leasehold and “overcome the legal problems with commonhold that are undermining its use” 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.
- 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, including 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.
To send feedback, e-mail jess.harrold@egi.co.uk or tweet @estatesgazette
