Professor Nick Hopkins and Daniel Robinson outline the Law Commission’s recommendations for transforming the future of home ownership in England and Wales.
On 21 July, the Law Commission published recommendations for comprehensive reform of leasehold enfranchisement and the right to manage, as well as recommendations to reform commonhold, which allows for flats to be owned on a freehold basis.
Our recommendations sit alongside the government’s own proposals for leasehold reform, including its flagship proposals to ban leasehold houses and to ban ground rents.
The terms of reference for the Law Commission’s work are weighted in favour of homeowners. We were tasked with providing a better deal for leaseholders. This reflects a policy decision by the government, as well as increasing cross-party political consensus, that leasehold is failing to deliver the home ownership experience that people want. Leasehold has been described as “feudal” by the government, and as “medieval” by the opposition. The House of Commons Housing Select Committee recently concluded: “The balance of power in existing leases, legislation and public policy is too heavily weighted against leaseholders, and this must change.”
There have been two different, but equally important, strands to our work.
The first strand: reforming leasehold
We have made recommendations for extensive reform of the enfranchisement regime and the RTM. Our recommendations would shift the balance of power in favour of leaseholders, as well as making the regimes simpler, easier and cheaper to operate for both landlords and leaseholders. Some key recommendations include:
- Transforming the scope of the rights so more leaseholders can benefit from them – for example by allowing leaseholders to buy the freehold, or take the management, of buildings with up to 50% commercial space (rather than 25%, as is currently the case), and allowing claims in respect of multiple buildings at once (for example, several buildings on an estate) rather than claims having to be block-by-block.
- For leaseholders of both houses and flats, creating a new right to a lease extension – with no ground rent – for a term of 990 years, in place of shorter extensions of 90 or 50 years under the current law.
- Protecting leaseholders from procedural traps and potentially unnecessary or unreasonable ongoing payment obligations.
- Eliminating or controlling leaseholders’ liabilities to pay their landlords’ costs of a claim, making the processes more affordable and predictable.
Leaseholders must pay their landlord a premium in order to exercise enfranchisement rights. In January 2020, in accordance with our terms of reference, we published our report setting out the options that are available to reduce premiums, while ensuring landlords receive sufficient compensation. The options included:
- removing the requirement to pay marriage value
- prescribing the rates that are used to calculate premiums
- capping the premium in so far as it relates to onerous ground rents
- deferring any payment for development value.
The options for reform would allow the government to create an online calculator to determine premiums, much like the online tax calculators with which many are now familiar.
Result of our recommendations
Our enfranchisement and RTM recommendations would transfer control from landlords to leaseholders. Our enfranchisement recommendations would also place the financial value of a home firmly in the leaseholder’s hands. The landlord’s ongoing financial stake – the valuable right to receive ground rent and to recover possession in the future – would no longer exist. The price that leaseholders have to pay, in order to remove the landlord’s ongoing financial stake, could also be reduced if the government implements any of the options that we set out for reducing premiums.
The second strand: reinvigorating commonhold
While our recommendations to reform enfranchisement and the RTM would result in leaseholders having greater control and the full financial stake in their homes, those regimes do not, in general, remove the landlord-tenant relationship. For leaseholders of houses who buy the freehold, the landlord-tenant relationship disappears. But for leaseholders extending their leases, for leaseholders buying the freehold to their block of flats, and for leaseholders exercising the RTM, there continues to exist a landlord-tenant relationship.
The problems with leasehold ownership
From a leaseholder’s point of view, owning a leasehold home has two main problems, which are inherent in the system: first, that the lease is a time-limited asset – it will expire at some point in the future; second, that control of the home is shared with a third party – the landlord. Those disadvantages provide landlords with a corresponding financial benefit.
In addition, the current leasehold regime seeks to regulate the relationship between landlord and leaseholder on the premise that they have opposing interests. Ultimately, leasehold was not designed as a scheme to manage interdependent properties such as flats. It has been adapted to perform a task that it is ill-suited to undertake. Because it is ill-suited to the task, leasehold has been used – and abused – so that people’s homes are too often seen as an income stream for third parties.
Commonhold as an alternative
Criticism of leasehold, as a mechanism of delivering home ownership, dates back to the Wilberforce Committee’s recommendations in 1965. It continues to this day.
Around the world, owners of flats have freehold ownership through regimes such as “strata” or “condominium” title. An equivalent system in England and Wales – called “commonhold” – was created in 2002. Since then, more than 700,000 flats have been built in England alone, of which around 150 – or 0.0002% – were sold on a commonhold basis.
It is unsurprising that developers have continued to sell flats on a leasehold basis. Commonhold ought to be more attractive to consumers – but there is a lack of consumer awareness of commonhold and, in any event, the unbalanced supply and demand of housing means that consumers have limited clout to demand commonhold instead of leasehold.
Ultimately, the financial incentive is for developers to sell flats on a leasehold basis. Selling a leasehold flat means the developer retains – or can sell to an investor – the right to ongoing ground rent and other income (such as commissions or administration fees) from the leaseholder. A leasehold home can therefore be sold twice. By contrast, a commonhold flat can be sold just once – to the homeowner – and there is nothing left over for the developer to make money from.
So, if a developer can sell a leasehold flat for £200,000 and then sell the freehold to an investor for £5,000, why would they decide instead to sell a commonhold flat for £200,000?
Our work on commonhold reform does not, and cannot, overcome that financial barrier to the uptake of commonhold. Our project involves a review of the legal design of the commonhold regime, which currently has deficiencies. Our recommendations would make commonhold workable, in practice, for all future developments, and would allow existing leaseholders to convert to commonhold.
The government wishes to reinvigorate commonhold. The implementation of our recommendations is necessary to achieve that aim. But it is not sufficient. The other barriers to commonhold taking off – in particular the current financial incentive for developers to use leasehold – would need to be overcome.
The government’s proposed leasehold house ban would prevent developers from selling houses on a leasehold basis.
Our recommendations to reform commonhold would also allow the government to ban the sale of flats on a leasehold basis.
To reinvigorate commonhold, the government will need to decide whether (a) to ban leasehold for flats or (b) to provide financial incentives to use commonhold (to overcome the current financial incentives to use leasehold). The alternative is to leave commonhold as an optional alternative for any developer who wishes to use it, but it is clear to us that doing so would result in no change to the 0.0002% of flats that are currently sold on a commonhold basis. The way in which commonhold should be reinvigorated is a political decision, and it is not our role to make a recommendation as to what the government should do.
However, we are clear that commonhold is preferable to leasehold as a mechanism to deliver home ownership. It overcomes the inherent limitations of leasehold. It is tailor-made to regulate a group of interdependent properties, in place of the current ad hoc regulation of an adversarial relationship between landlord and leaseholder. And it is used successfully around the world.
Opposition to commonhold
Throughout our work, we have heard arguments that commonhold cannot work and that leasehold is preferable. Leaseholders, it is said, are unwilling and unable to be involved in the management of a block or estate. The view is expressed that landlords provide an important service that cannot be provided in commonhold, and that they are long-term stewards of assets. At its extreme, it has been said to us that leasehold should be promoted around the world as a better alternative to other countries’ commonhold-equivalent systems.
We are not aware of any call from other countries to adopt our leasehold system. Conversely, there is a strong call here for commonhold, in order to provide parity with the norm in other countries.
Commonhold can work
These arguments are based on a false assumption that commonhold equates to amateur management. Adopting commonhold does not mean abandoning the input of property professionals in the management of buildings and estates. Professionals will continue to be crucial to the management of a commonhold development. Significantly, however, the choice of professionals and their fees will be controlled, democratically, by the commonhold association – which is all of the owners. That is in stark contrast to leasehold where a landlord controls who does what and how much it costs, yet passes on all of the costs to the leaseholders. Structurally, there is no incentive on the landlord to obtain good value for money, which the Competition and Markets Authority has previously raised as a concern.
As for “leaseholder apathy”, there can be reluctance from some leaseholders to become involved in the management of their block. Many would say that, in a system which disempowers leaseholders, that is hardly surprising. We conclude in our report that it should not be assumed that apathy generated in a leasehold system – where the long-term financial investment and control of a building lie with an external third party – will carry over into a system in which, from the outset, investment and control lie with the unit owners.
In order for commonhold to work, there needs to be a culture change – a willingness on the part of homeowners in flats to accept and embrace their empowerment, with the assistance of their choice of property professionals. But we already see that responsibility being put into the hands of the owners of freehold houses. So why not the owners of freehold flats?
There are many in the sector who benefit financially from leasehold ownership, and they will not welcome any change that sees commonhold being introduced – or even any change that sees ground rents being reduced to nothing through an enfranchisement claim (as we recommend) or banned in the future (as the government proposes). The right to receive ground rent provides an investor with a safe, certain, reliable, and long-term income, making it a hugely attractive asset. The income can be pure profit for investors, but it can also be used for socially important purposes. For example, many charities and pension funds derive income from the leasehold system.
But that does not make the leasehold system appropriate as a matter or legal or social policy. After “purchasing” their home, homeowners do not want it to be a source of ongoing income for a third party. They want the financial stake in their home to belong to them, and only them. And they want to control their home. The ambition of home ownership in England and Wales is not currently being achieved through leasehold ownership. It could be through commonhold.
Criticism will continue to be levelled at commonhold. It will be said that it does not and cannot work. Fundamentally, however, commonhold works around the world. If you buy a flat in nine of the 10 most expensive cities in the world, it will be commonhold-equivalent – only in Hong Kong (which has its roots in English law) would it be leasehold.
Buildings in those cities are not falling down. The property market is not failing as a result of the use of commonhold-equivalent regimes. And developers are continuing to build.
If commonhold can work around the world, it can work here.
More details on the Law Commission’s proposals >>
Listen to EG’s podcast interview with Professor Nick Hopkins >>
Professor Nick Hopkins is the law commissioner for property and Daniel Robinson is a lawyer at the Law Commission
