The volume and pace of proposed reforms to leasehold property ownership is commendable.
From disillusioned members of “generation rent” to those who purchased a leasehold family home only to find it subject to onerous ground rent provisions, the issues span many sections of society.
But are we in danger of falling into a moral panic? Well-intentioned legislation may provide newsworthy soundbites, but the volume of proposed reform is so fast that it risks becoming incoherent. Even the largest developers need to work hard to follow every proposal.
Pledge for leaseholders
The government has recently issued this public pledge (see box). Freeholders are strongly encouraged to sign up and pledge to amend clauses in which ground rent doubles more frequently than every 20 years.
But those who never proposed such clauses may be reluctant to do so, in case they are considered guilty by implication.
The pledge also includes somewhat ill-conceived statements, such as pledges that managing agents should act fairly and transparently in relation to the leaseholders they serve; and a pledge that legal advisers should act in the best interest of each client.
Of course, managing agents and legal advisers are heavily regulated through their own professional codes of practice and conduct, and so perhaps this pledge demonstrates a fundamental misunderstanding of the complexities of the industry.
Abolition of section 21 notices
This consultation (see box) looks set to pave the way for “open-ended” residential tenancies that a landlord cannot seek to terminate by reason of effluxion of time alone.
Tenants’ interest groups have long protested against the perceived injustices of “no-fault” evictions using the two-month section 21 notice procedure, so the announcement is being seen as a major coup for “generation rent”.
Indeed, having commenced the consultation and stated its objectives, it seems unlikely that the government will ever be able to put this particular genie back in the bottle.
However, as ever with new legislation, the devil will be in the detail, particularly when it comes to securing possession from tenants under the new rules and reviewing rents fairly.
Termination of tenancies owing to tenant default will probably be the most controversial factor for the government to consider. Other than with simple cases of non-payment of rent, proving default is likely to require detailed evidence, so it remains to be seen how the government will provide an effective termination procedure, without risking tenant rights.
It appears that landlords will have the right to obtain possession if they want to sell the property and anti-avoidance mechanisms could be used to prevent this being abused. Minimum ownership periods could apply, although tax considerations may render artificial sales of the landlord’s interest uneconomical in many cases.
A landlord’s desire to redevelop could also provide a ground to retake possession. If so, we would expect this to follow the rules for business tenants with security of tenure, meaning landlords could be required to prove their intention to redevelop.
Finally, with longer terms, it remains to be seen how often rent reviews could be imposed by a landlord or how they could be made uniform. Indexing rents over a long period of time can lead to unfair results for either party, while establishing “open market rent” can be expensive and time consuming.
Commonhold
Commonhold is a system of land ownership in which an individual can own the freehold to a “unit” (a house or flat) and also be a member of a “commonhold association” which owns the shared areas in the development. This has been possible since 2002, but uptake has been very low.
The Law Commission’s commonhold consultation (see box) seeks to reinvigorate the commonhold ownership system, as a viable alternative to leasehold ownership. It identifies various barriers to the uptake of commonhold, and proposes various means of resolving these.
But does a commonhold model work for mixed-use developments?
Some responses to the Law Commission’s commonhold consultation suggest that there should be no provision at all for mixed-use commonholds at this stage, as this is a step too far until the system of commonhold becomes more established.
Particular concerns have been raised in relation to the financing of such schemes. As an example, a developer’s funding bank takes a mortgage over the scheme during the development phase.
However, if this development is a commonhold then each phase is transferred from the developer to the commonhold association at completion – thus diminishing the land over which the bank has security, as it will have a charge over the unsold units only.
Community stewardship
But others have not taken such a scorched-earth approach – querying the practicalities of commonhold only for the most complex schemes. In large mixed-use schemes, developers need the control to be able to vary common areas: for example, if planning requirements change or if the nature of the development requires it – and this is more difficult if those common areas have already been transferred to the commonhold association.
Many developers see themselves as placemakers, and take their stewardship of the community that they are creating very seriously. Some argue that these legitimate intentions should not be thwarted by the legal structure of the development.
The recent select committee report (see box) has recommended that commonhold should be the primary model of ownership of new flats in England and Wales.
This recommendation went further than many expected, though the report does acknowledge that it may be the case that “the most complex, mixed-use developments would continue to require some form of leasehold ownership”.
Perhaps the better approach would be to reform the leasehold system to ensure a fairer deal for all parties. Some large developments sell houses on a leasehold basis in order to ensure that estate-wide obligations are enforceable against all owners via the landlord and tenant relationship.
This is because of a loophole in the law – although restrictive covenants (those in which parties agree not to do something) pass with the land they relate to, positive covenants (those in which parties agree that they shall do something) cannot pass automatically when the land is transferred – this means that obligations cannot be passed to successive owners.
Commonhold attempts to address this in the context of interdependent properties sharing some common parts, but there is no straightforward means of doing this outside of a commonhold structure. If freehold positive and negative land obligations were introduced (as recommended in the Law Commission’s report on Easements, Covenants and Profits a Prendre (2011)), this loophole would be closed – and the case for commonhold might be less compelling.
Enfranchisement
The Law Commission’s enfranchisement consultation (see box) intends to promote transparency and fairness, and provide a better deal for leaseholders as the consumer, and includes the contentious question of whether premiums payable by leaseholders on enfranchisement should be reduced.
In the context of mixed-use schemes, enfranchisement rights can affect investment value and also bring with them practical and management consequences, particularly where only one building in an estate comprising several blocks is acquired collectively by the leaseholders in that block.
One of the proposals under consultation is that the right to collectively enfranchise should not be limited to leaseholders in a single block of flats, but that it should be possible for leaseholders on an estate to purchase the entire estate collectively, with the landlord taking a lease back of any non-residential units. This potential loss of management control in these circumstances will be worrying for landlords of mixed-use estates.
The consultation also invites views on whether leaseholders should continue to be required to contribute to a landlord’s non-litigation costs on an enfranchisement. This is on the basis that many leaseholders criticise the level of these costs and the expense of contesting any unreasonable sums that are claimed.
Currently an application must be made to the Tribunal to challenge a landlord’s professional costs, which often results in those costs being paid by the leaseholder, even if they are patently unreasonable. A fixed-costs regime is being considered, but is likely to be resisted by landlords in the same way that any reduction in premiums will be.
It is not unusual for collective enfranchisement claims to take between one year and 18 months to complete. This is burdensome for landlords and leaseholders alike, and so any simplification and streamlining of the process and procedures that are in place should be welcome for all.
Final word
The BPF states that commercial real estate contributes £94bn to the UK economy – that’s more than 5% of GDP. If any reforms unduly stifle development or encourage international investors to look elsewhere, then will they be counterproductive?
In the meantime, developers are in a difficult position – they need a wide-ranging awareness of the proposed reforms, without yet knowing their full extent. They can make representations to the government, but it remains to be seen whether these will be heeded.
What’s happening to reform the system?
There are three strands of work ongoing in relation to the leasehold market.
- The Ministry of Housing, Communities and Local Government (MHCLG) is reviewing unfair practices in the leasehold market. Recent announcements have included the Housing, Communities and Local Government Select Committee report to the government (20 March 2019), the leaseholder pledge (28 March 2019), and the consultation on the abolition of section 21 notices (15 April 2019).
- The Law Commission Residential Leasehold and Commonhold project is addressing leasehold enfranchisement, the right to manage, and commonhold. Recent developments include the consultation on leasehold enfranchisement reform (closed on 7 January 2019), the consultation on commonhold reform (closed on 10 March 2019) and the consultation on right to manage (closed on 30 April 2019).
- A private members’ bill, proposed by Justin Madders MP (Ellesmere Port and Neston) (Lab) (the Leasehold Reform Bill 2017‑19) is progressing through parliament. It calls for reform to leasehold legislation.
Lisa Bevan is a senior counsel, Edward Cooper is a senior associate and Katherine Lang is a knowledge counsel at Taylor Wessing LLP
