The UK government has long recognised that the leasehold and commonhold systems in England and Wales are far from fit for purpose. Onerous charges, archaic practices, and arbitrary rules and regulations have made what was once a system to be envied and system to be despised.
That is why, in 2017, the Government asked the Law Commission to recommend suggestions and improvements to reform the entire system, making it fairer and more reflective of an expanding and developing world. These recommendations have recently been published to garner opinions from the wider public.
The non-residential limit for collective enfranchisement
The current law excludes a property containing flats from being eligible for enfranchisement if the non-residential parts of the property amount to more than 25% of the total internal floor area. This arbitrary figure has meant that many properties have been excluded, despite clearly being residential properties. Many leaseholders expressed that this rule posed a significant barrier to their ability to purchase the freehold.
Therefore, the Law Commission has recommended that this criterion be increased to 50% of the total internal floor area.
Some freeholders have expressed concern about this proposal, suggesting that many leaseholders would lack the adequate experience and skills to manage a property where up to 50% of the internal floor area is non-residential.
Individual freehold acquisitions
Under current law, individual enfranchisement of flats is not possible as leaseholders must collect together to form a majority to acquire their freehold. The Law Commission has recommended that a new scheme of qualifying criteria for individual enfranchisement be introduced. However, this has not been considered in much detail, and the UK and Welsh governments will be providing a further response shortly.
In addition to a new qualifying criterion, it has been recommended that the non-residential limit in individual freehold acquisitions also be raised to 50%, so that it is consist with the suggested limit for collective enfranchisement.
‘Leaseback’ is where, in a collective enfranchisement claim, the landlord of the building may retain certain units or leases. This reduces the premium which leaseholders must pay to acquire the freehold and allows the landlord to retain an interest in the property. However, currently, whilst the landlord can compel leaseholders to grant them a leaseback, leaseholders cannot compel the landlord to take a leaseback (unless it is a flat let on a secure tenancy to housing associations.
Therefore, the Law Commission has recommended introducing mandatory leasebacks, which would give leaseholders the option to compel the landlord to take on leases of any of the non-participating flats; making it more affordable and accessible.
The non-residential limit in right to manage claims
The right to manage gives leaseholders of flats the ability to take over the landlord’s management functions in their building. However, currently, the law excludes any premises from right to manage claims where the non-residential parts of the building exceed 25%.
The Law Commission has instead recommended that this be amended to exclude properties where more than 50% of the total internal floor area is non-residential, bringing it in line with similar proposals in collective enfranchisement and freehold acquisitions, as mentioned above.
Right to manage – voting powers
The Law Commission has recognised that, if the non-residential limit in right to manage claims is increased to up to 50% (as discussed above), voting powers within the RTM Company will need to be reconsidered also. This is because, due to the way that votes are allocated, a change of up to 50% to the non-residential limit will drastically increase voting power for landlords or commercial leaseholders and will almost always result in the residential leaseholders being outvoted.
The Law Commission proposed several suggestions in their Right to Manage Report (published July 2020), and concluded that the most appropriate suggestion would be to impose a cap on votes allocated to landlords to a maximum of one-third of the total votes exercised. This will allow leaseholders to have significant control over decisions but would still allow for the landlord to have a say.
Commonhold voting rights for shared ownership properties
Commonhold is an alternative to the leasehold system, where freehold ownership is offered to homeowners within a shared infrastructure, such as a block of flats. All those involved will belong to a ‘commonhold association’, which owns and manages the non-residential parts of the freehold through a democratic voting system. Commonhold as a type of ownership was introduced in 2002 but has not been very popular with mortgage companies and developers and so the uptake of commonhold properties is low.
Currently, however, the law does not permit any leases over 7 years within the commonhold, meaning that all those with Shared Ownership leases are excluded. The Law Commission is thus looking at ways to incorporate Shared Ownership within the commonhold.
The Law Commission is also looking at how shared ownership leaseholders would be able to exercise voting rights in the commonhold. It has been proposed that shared ownership leaseholders should have the same voting rights as commonhold owners, save for the decision to terminate the commonhold. This is, however, still under review.
Home buying and selling: commonhold
Commonhold, being a specific type of freehold purchase, has a slightly different process when it comes to buying and selling. One of these differences is the existence of a Commonhold Unit Information Certificate, outlining the debts owed by the owner towards the commonhold. Currently, the commonhold association has 14 days to produce the Certificate, albeit with no real consequence if this isn’t complied with. There is also no set fee for producing the Certificate, meaning the fee can be decided at the discretion of the commonhold association with no higher cap.
The Law Commission has, therefore, proposed introducing a maximum fee for producing a Certificate; with the exact fee still up for debate. Additionally, it has recommended that a sanction be imposed for those associations who do not provide the Certificate within the 14 days; suggesting that the association will not be entitled to charge for the Certificate but will still be obligated to provide it if they cannot comply within the timeframe.
February 2022 saw the first of many big steps to change in the leasehold and commonhold systems. The Leasehold Reform (Ground Rent) Bill, first introduced in May 2021, is the Government’s first step in a two-fold process to tackle leasehold reforms. The Bill, which intends to fulfil the Government’s commitment to set future ground rents to zero, passed through the House of Commons and House of Lords to receive Royal Assent on 8 February 2022, making the Bill an Act of Parliament. The Act will likely come into force after the first quarter of 2023.
How Moore Barlow can help you
If you are looking for more information on leasehold and commonhold reforms, please contact our residential property team.