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When buying a property in England or Wales there have been historically two main types of ownership, freehold and leasehold.
‘Freehold’ is the complete ownership of a piece of land together with anything which is built upon it.
‘Leasehold’ means that you have a lease from the freeholder (also known as the landlord) for a number of years. The leases are usually long term – often 90 years or 120 years and they can be as high as 999 years.
A new type of ownership was however introduced by the Commonhold and Leasehold Reform Act 2002 as an alternative to leasehold namely 'Commonhold'.
Despite commonhold having been around since 2002 it has for several reasons failed to take root and become an effective means of property ownership in England and Wales. Reforms concerning home ownership have been discussed for some time, and it seems that the future of home ownership is now set to change.
The aim of all the proposed reforms can be summarised as seeking to create an appropriate and feasible home ownership model for all in England and Wales, and avoiding the various abuses that some developer landlords have introduced, particularly in the case of leasehold, in the last 25 years or so.
Leasehold enfranchisement is a process to either extend an individual lease or to collectively purchase the freehold along with other tenants (and gain a share of the freehold), which is known as ‘collective enfranchisement’.
Tenants of flats have a qualified right to a 90-year lease extension at a peppercorn ground rent in return for the payment of a premium to the landlord. Tenants of leasehold houses have similar rights, but the period of statutory extension is 50 years.
Tenants are, in addition to paying the premium, responsible for the landlord’s reasonable costs.
Collective Enfranchisement is a right, subject to qualification, for the owners of flats in a building, and sometimes part of a building, to join together and buy the freehold of that building.
The participating tenants then decide who the nominee purchaser will be i.e. the person to whom the freehold (and other interests) is conveyed. This is likely to be a company acquired or formed especially for the purpose.
The nominee purchaser is liable for the freeholder's reasonable costs on completion. The freeholder’s costs can, when appropriate, include in-house costs or managing agents’ fees, in addition to the cost of solicitors and valuers.
The Law Commission recommendations are:
The Right to Manage (RTM) was introduced by the Commonhold and Leasehold Reform Act 2002. Put simply, it gives tenants with long leases (leaseholders) the statutory right to take over the management of their property from the landlord by setting up a RTM company without buying the freehold. The RTM company, or an agent on their behalf, takes control of services, repairs, maintenance, improvements, and insurance –without having to prove any fault on the part of the Landlord or existing Management Company.
The acquisition of the RTM can take some time and there are plenty of opportunities for errors if procedures are not followed correctly throughout.
The Law Commission recommendations are:
Commonhold is the newest way of owning property in England and Wales. However, despite commonhold having been around since 2002, it is estimated that fewer than 50 blocks of flats across England and Wales are commonhold properties.
The majority of those that are now commonhold are new builds where the developer has transferred the land as commonhold to the flat owners. This land is registered as commonhold rather than freehold with each individual flat owner, referred to as a Unit Owner, having absolute ownership of their property in perpetuity.
It is possible for tenants to convert their leasehold interest to commonhold. This process is known as ‘Conversion’.
The Law Commission recommendations are:
The Law Commission has produced three detailed reports concerning the proposed reforms set out above, and it is now for the Government to consider these recommendations and decide whether to legislate to bring these recommendations into force.
Leasehold is a complex system of ownership with many traps for the unwary. If you have any queries concerning a Lease Extension, Collective Enfranchisement or Commonhold please contact our team on 0118 959 7711 who will use their in-depth knowledge to provide you with sound, pragmatic advice.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.
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