With the Leasehold Reform (Ground Rent) Bill making its way through Parliament, and the Law Commission proposing ground-breaking reforms to the leasehold system, you might be wondering – ‘what do I need to know?’. This factsheet will help you know some of the key proposals that could be changing to the leasehold and commonhold systems.
The non-residential limit for collective enfranchisement
Currently, a property containing flats is excluded from being eligible for enfranchisement (purchasing the freehold) if the non-residential parts of the property amount to more than 25% of the total internal floor area. This has meant that properties have been ineligible for enfranchisement, despite clearly being residential properties.
So, what could be changing? The Law Commission has recommended that this criterion be increased
to 50% of the total internal floor area, meaning that more properties with flats will be eligible for collective enfranchisement than ever before.
Individual freehold acquisitions
Currently, individual enfranchisement for flats cannot take place – only collective enfranchisement can.
So, what could be changing? The Law Commission has suggested introducing individual freehold acquisitions, which will allow individuals to purchase the freehold to their flat if they, the premises, and the flat can all meet a prescribed eligibility criterion.
The non-residential limit in right to manage (RTM) claims and voting powers
The RTM gives leaseholders of flats the ability to take over the landlord’s management functions in their building. However, in a similar way as with collective enfranchisement, the law excludes any premises from RTM claims where the non-residential parts of the building exceed 25%.
So, what could be changing? The Law Commission has recommended that this criterion be increased to 50% of the total internal floor area, meaning that more properties containing flats will be eligible for RTM claims.
However, if the non-residential limit is increased to up to 50%, voting powers of the RTM Company will need to be reconsidered also. This is because changing the limit to up to 50% to include commercial properties would dramatically increase voting powers for landlords and will almost always result in the leaseholders being outvoted.
So, what could be changing? The Law Commission has suggested imposing a cap on votes allocated to landlords to a maximum of one-third of the
‘Leaseback’ is where the landlord in a collective enfranchisement claim may retain certain units or leases, such as those that do not qualify under the current enfranchisement regime. 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 participating leaseholders cannot force the landlord to leaseback the non-participating flats unless a flat is let on a secure tenancy by a housing association.
So, what could be changing? The Law Commission has recommended introducing mandatory leasebacks which will compel the landlord to take on leases of any non-participating flats if demanded to do so by the leaseholders, making enfranchisement more affordable and accessible.
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. Commonhold is not particularly attractive to lenders and developers and so has not been widely adopted in the current market.
All those involved would belong to a ‘commonhold association’, which owns and manages the non- residential parts of the freehold through a democratic voting system. Currently, 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 now looking at ways to incorporate shared ownership within the commonhold and give shared ownership leaseholders voting rights in the commonhold association.
Home buying and selling: commonhold
When selling commonhold units, a Commonhold Unit Information Certificate is required which outlines the debts owed by the owner towards the commonhold. There is also no set fee for producing the certificate, meaning the fee can be decided at the discretion of the commonhold association.
So, what could be changing? The Law Commission has proposed introducing a maximum fee for producing a certificate and sanctions for those associations who do not provide the certificate within the current 14 days limit.
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