This article seeks to discuss the possible direction and future of leasehold in the context of the changing leasehold climate.
The Practitioners View
It is difficult for legal practitioners to advise leaseholder clients on their best way forward when considering whether they should extend their lease without delay or await potential legislative change. Equally, it is just as hard to advise the freeholder client as to whether they should await the service of a section 42 notice under the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) (1993 Act) by their leaseholder or be proactive, pre-empt a change in the law and grant a voluntary lease extension varying the ground rent to zero and extending the term.
What is the sole reason for this difficultly to advise? The uncertainly surrounding the anticipated changing landscape of leasehold. It is certainly encouraging that the first stage of leasehold reform has now been enacted as of June 2022 but the second wave of change is hotly awaited and just as hotly debated amongst both the freeholder and leaseholder camps. As practitioners, we are very much caught in the middle of the debate. Often acting for both leaseholders and freeholders, we see both sides of the story, agree almost unanimously that change is required but we disagree as to the extent of that change.
Where are we in the Process for Leasehold Reform?
- On 21 December 2017 the Government announced plans to tackle the growing problem of newly built houses sold as leasehold and to limit ground rents on new leases. Leasehold reform was included in the Law Commission’s 13th Programme of Law Reform with the aim of finding ways to make buying a freehold or extending a lease “easier, faster, fairer and cheaper.”
- The Law Commission’s work on leasehold reform is complete. The Commission has carried out a full review of enfranchisement law and procedure with several proposals published in July 2018 to help existing leasehold homeowners buy the freehold of their houses; In September 2018 a consultation paper proposed “a new, single regime for leasehold enfranchisement designed to benefit leaseholders of houses and flats.”
- In 9 January 2020, the Commission published “Leasehold home ownership: buying your freehold or extending your lease – Report on options to reduce the price payable.” A final report on reforming all aspects of leasehold enfranchisement was published on 21 July 2020 entitled “Leasehold homeownership: buying your freehold or extending your lease” with a summary report published alongside.
- The Law Commission also reviewed leaseholders’ Right to Manage. A consultation exercise was launched in January 2019 with a final report published on 21 July 2020: “Leasehold home ownership: exercising the Right to Manage”.
- The Law Commission issued “Commonhold: A Call for Evidence” on 22 February 2018. A public consultation exercise launched on 10 December 2018 with a final report published on 21 July 2020: “Reinvigorating commonhold: the alternative to leasehold ownership” together with a summary document.
- The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022. This Act fulfils the commitment to “set future ground rents to zero.” The provisions apply only to new lease agreements. New leases of retirement properties are in scope, but not before 1 April 2023.
- The Queen’s Speech 2022 said: “The Government will be taking forward a comprehensive programme of reform to improve fairness and transparency in the leasehold market.” No additional detail on timing was provided other than reference to implementing leasehold and commonhold reform “in this Parliament.”
- On 9 November 2022, Lucy Frazer, the Minister for Housing and Planning, responded to a PQ on progress in introducing leasehold reform. She said: “The Government has committed to making enfranchisement cheaper for leaseholders by reforming the process of valuation leaseholders must follow to calculate the cost of extending their lease or buying their freehold.”
It cannot be debated that there is a commitment from the Government to reform leasehold but the questions of “when and how?” remain without any concrete timeline for the second and more far- reaching second stage of leasehold reform.
The First Stage of Reform – The Leasehold Reform (Ground Rent) Act 2022
Described by the Government as “part of the most significant changes to property law in a generation”, the Leasehold Reform (Ground Rent) Act 2022 (LRGRA 2022) received Royal Assent on 8 February 2022 and came into force on 30 June 2022. The LRGA 2022 marks the first of a series of anticipated leasehold reforms. The Act applies to all new residential long leases being granted, and voluntary lease extensions.
Voluntary lease extensions
Many freeholders see the benefit in granting voluntary lease extensions to their leaseholders, but this once valuable tool arguably became slightly less valuable as of 30 June 2022. The ability for a freeholder to charge ground rent to their leaseholder on the newly extended term of any lease extension was abolished if the existing lease is deemed to be surrendered and regranted.
Freeholders can no longer grant voluntary lease extensions with increasing ground rents in return for a premium. Instead, they can voluntarily agree to grant newly extended leases in return for a premium with a peppercorn ground rent (i.e. nil ground rent). Given the existence of the LRGA 2022, ground rent in this situation would remain payable as per the existing lease for the duration of the existing lease term and would become a peppercorn for the newly extended term.
It is worth noting that such voluntary lease extensions may not be negotiable by the leaseholder both in terms of the premium payable by them to the freeholder, extended term being offered (perhaps back up to the original term for example) or the legal and valuation fees sought. Such professional costs are not subject to reasonableness and proportionality as they are under the statutory regime – note too though that costs are not prescribed or fixed under the statutory regime (this may be changed).
What are the consequences of LRGRA 2022?
Interestingly, many freeholders could find themselves in a situation whereby newly developed blocks of flats could well have leases which are not uniform. Pre-June 2022 leases can of course still contain ground rent, but post-June 2022 leases will not.
Is the future Commonhold?
Commonhold is fundamentally different from leasehold. Analogous to the Australian ‘strata’ system or condominium ownership commonly seen in the USA and Canada, commonhold provides indefinite freehold ownership of property with shared ownership of common areas and services. There is no concept of a flat but instead the land is divided into units, whether commercial or residential, and managed jointly by each unit owner as a member of a commonhold association. The commonhold association must keep to the rules of a commonhold community statement (the CCS) which defines the physical extent of each unit and the common parts, fixes the amount of each owner’s contribution to maintenance costs and sets out the duties and obligations of each owner. It is perceived as conferring on property owners greater control of their property, regulating the affairs of a group whose interests are broadly aligned.
Despite its introduction in 2002, commonhold has been rarely exercised with fewer than 20 commonholds having been created. In a bid to address these shortcomings and reinvigorate commonhold as a realistic alternative to leasehold, the Law Commission forwarded over 120 proposals for its reform. These include protecting the interests of lenders, facilitating easier conversion from leasehold to commonhold ownership, and improving the clarity and flexibility of the CCS. Detailed consideration was also given to governance of the CCS and dispute resolution.
On 13 May 2021, the Government launched the Commonhold Council – an advisory panel of leasehold groups and industry experts to inform the Government on the future of this type of homeownership. The Commonhold Council, chaired by the Building Safety Minister and supported by a Technical Support Group, advises the government on the implementation of a reformed commonhold regime and seeks to bring forward solutions to prepare homeowners and the market for the widespread take up of commonhold. Their role is to also identify the necessary steps to prepare the market (lending, development, insurance, valuation, conveyancing, home buying and selling and property management) and to deliver supporting market infrastructure.
What could Change?
This is a question facing the legal profession every day which cannot be answered with any degree of certainty. A few key changes that have been identified are as follows:
- There will be a reform of the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold. Marriage value may be abolished but could be replaced with another compensatory arm for freeholders. Ground rents may be capped at 0.1% of the freehold value and prescribe rates for the calculations at market value. An online calculator will simplify and standardise the process of enfranchisement.
- There may be the ability for leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.
- The existing 25% rule for non-residential use which precludes many mixed-use buildings from collectively enfranchising may be increased to 50% enabling more buildings to acquire their freehold.
- There may be a standardisation of the form of notices required to extend leases or collective enfranchise or their right to manage limiting the ability for freeholders to deny the validity of a notice.
- Timeframes for the freeholder to respond to a statutory claim may be reduced.
- Costs recoverable from the leaseholder in statutory claims may be capped or fixed.
- There may be an emphatic push towards commonhold as opposed to freehold ownership.
Final Thoughts
Freeholders and leaseholders are somewhat caught in limbo, currently questioning what the future will hold for lease extensions as well as the leasehold enfranchisement arena in general. From the freeholders’ point of view, will once valuable short leasehold reversions hold the same value in the future as they do now? Alternatively, should a leaseholder extend their lease now or wait? Will ground rent abolition apply retrospectively to existing leases when the next stage of legislation is eventually introduced? Will there be a complete overhaul of the numerous Acts that govern leasehold enfranchisement?
The Law Commission makes a compelling case for the adoption of commonhold as an alternative form of tenure. The creation of the Commonhold Council is clear evidence of the Government’s objective to make commonhold a viable mechanism for home ownership. The biggest hurdle may be persuading leaseholders and freeholders alike to embrace the change. Realistically, can commonhold provide a workable alternative to leasehold? Can the system really operate in as many settings as possible – including large and complex sites? Can this tenure be future proofed to take account of changing requirements for buildings such as building safety and energy efficiency measures?
The profession waits with baited-breath for answers and the devil is of course very much in the detail. With no set dates for future legislation, leaseholders are very much stuck between a rock and a hard place deciding whether to sit tight and await the anticipated legislation or bite the bullet and exercise their statutory rights.
About the Author: Katie Cohen
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