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 Law Commission has published three reports in which they recommend reforms to three areas of law:
- leasehold enfranchisement, which is the right for people who own property on a long lease (“leaseholders”) to buy the freehold or extend their lease;
- the right to manage, which is a right for leaseholders to take over the management of their building without buying the freehold; and
- commonhold, which allows for the freehold ownership of flats, offering an alternative way of owning property which avoids the shortcomings of leasehold ownership.
The Law Commission highlighted criticisms of specific aspects of how the leasehold market operates, for instance:
- legal, practical and financial obstacles for leaseholders seeking to exercise their statutory rights;
- high and escalating onerous ground rents;
- houses being sold on a leasehold, as opposed to freehold, basis, for no apparent reason other than for developers to extract a profit from owning the freehold;
- the absence of any compulsory regulation of managing agents
- excessive service charges, legal fees, or permission fees levied by landlords; and
- the legal entitlement of landlords to forfeit a lease if the leaseholder breaches a term of the lease.
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.
Reform of leasehold enfranchisement
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:
- that leasehold owners of houses and flats should no longer have different enfranchisement rights.
- that leaseholders of both houses and flats should have a new right to a lease extension for a term of 999 years, no ongoing ground rent under the extended lease and to prevent landlords from using the lease extension process to impose new, onerous obligations.
- a new right for leaseholders with very long leases to “buy out” the ground rent under their lease without also having to extend the length of their lease.
- that the scope of enfranchisement is expanded so that more leaseholders can buy the freehold or extend their lease.
- that leaseholders should be able to enfranchise immediately after acquiring their lease rather than having to wait two years, as they do now and that flat owners should together be able to buy the freehold of premises where up to 50% of the building is commercial space rather than the current limit of 25%;
- to make it easier for leaseholders of flats to enfranchise. For example, a recommendation that groups of flat owners should be able to acquire multiple buildings (such as an estate) in one claim, rather than incurring the unnecessary expense of acquiring each building individually.
- that leaseholders should be able to require landlords to take “leasebacks” of units within the building which are not let to leaseholders participating in the claim, which will significantly reduce the price that leaseholders must pay.
- to protect leaseholders from the imposition of onerous or unreasonable obligations when they buy the freehold of their house or flat. In particular, the Law Commission recommendations protect leaseholders from obligations which are designed to generate a profit or provide an ongoing income stream for landlords.
- replacing the various procedures for making enfranchisement claims with a single, efficient procedure with a view to remove the legal traps which cause claims to fail and which enable unfair procedural or tactical advantages for landlords with experience of the system.
- that the current requirement for leaseholders to pay their landlord’s costs of dealing with an enfranchisement claim should be eliminated or controlled.
- that, where possible, the Tribunal should determine enfranchisement disputes and issues, replacing the current division between the Tribunal and the county court.
Reform of the Right to Manage
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:
- removing the requirement that leaseholders pay the landlord’s costs of an RTM claim, including in any Tribunal proceedings.
- relaxing the qualifying criteria, so that the RTM can be claimed in respect of leasehold houses, buildings with up to 50% commercial space, and self-contained parts of buildings which do not meet the qualifying criteria, but which are capable of being managed independently;
- permitting leaseholders to acquire the RTM over multiple buildings (such as an estate). Where buildings are already managed together, it makes sense that the leaseholders of those buildings should be able to act together to acquire the RTM over multiple buildings, provided that each building meets the qualifying and participation criteria in its own right.
- reducing the number of notices that leaseholders must serve in order to claim the RTM and giving the Tribunal the power to waive procedural mistakes in claim notices.
- clearer rules for the management of property which is not exclusive to the premises claiming the RTM, such as shared gardens and car parks.
- that the RTM company should have the right to request information about the premises early on in the process so they can make an informed decision about claiming the RTM and can properly prepare for the handover of management functions.
- that free training should be made available to RTM company directors and prospective directors, ensuring that they are aware of their obligations under company law and in respect of building management.
Commonhold to be much more frequently used?
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:
- removing the requirement that conversion to commonhold needs the unanimous agreement of leaseholders and others with particular interests in the building.
- a simpler, more cost-effective procedure for converting to commonhold, which puts leaseholders in the driving seat and prevents tactical delays by those opposed to the conversion.
- to provide developers with the flexibility they need to build new commonhold developments.
- to accommodate shared ownership leases and home purchase plans in commonhold.
- to improve the day-to-day operation of commonholds, enhancing the experience of the homeowners living within them.
- a robust regime for financing commonholds, which will provide owners with a greater say on setting the commonhold’s costs and enhanced powers to take action against those who fail to pay their share.
- that every commonhold must maintain a fund towards future repairs, which will allow the cost of major works to be budgeted for over the years and will reduce the risk of large and unexpected bills.
- reforms to the content and layout of the commonhold’s rulebook (the commonhold community statement) that will make it easier for owners to understand their rights and obligations within the building.
- that where a change is made to the commonhold’s rulebook that particularly affects one of the owners, he or she will be able to apply to the Tribunal under our new regime of protection for the minority.
- additionally, where owners or the association fail to comply with the rulebook, we make recommendations to ensure that any disputes are resolved quickly and informally, through commonhold’s bespoke dispute resolution process.
- to provide greater certainty to lenders that their interests will be protected, including in the unlikely event of a commonhold association’s insolvency, or on the termination of a commonhold at the end of a building’s useful life.
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.