The Law Commission has released its report recommending changes to the current leasehold system. Please find below by way of a briefing and update.
The Law Commission was tasked with looking into the leasehold sector since it was identified as “not working” for millions of leaseholders in England and Wales. The main thrust of the reform is to give leaseholders greater control over their homes and offer a cheaper and easier route out of leasehold into establishing commonhold and enfranchisement.
The Law Commission published its findings on 21 July 2020. It is likely that if adopted the legislation will take between 3 to 5 years to come into being. There is a call for smaller pieces of legislation to be introduced in the meantime however there has been no response from the Law Commission or indeed Parliament on this as yet.
The report is in three parts and deals with;
- The right to manage (RTM)
The main points of this report are being introduced to make enfranchisement work more smoothly and efficiently and as follows:
- To streamline the system so that flats and houses come under 1 procedure.
- Freeholder’s costs payable by the leaseholders should be eliminated or controlled. This will be contentious and detrimental since the matter may not be dealt with professionally as Freeholders might be reluctant to employ professional advisers.
- The tribunal should determine enfranchisement disputes therefore replacing the role of the County Court – this will keep costs down.
- Blocks can be purchased with 50% non-residential space rather than the current 25% rule.
- Leaseholders will be able to compel landlords to take leasebacks of flats or commercial premises. Currently in the initial notice the leaseholder must make an offer to purchase the property outright which in some circumstances equates to high initial notice figures and can be a barrier to enfranchisement.
- Leaseholders will be able to buy the freehold of multiple buildings for example of an estate rather than individual vertically separated blocks. This will mean they will not have to achieve 50% participation in one particular block but across the estate.
- The two year ownership rule for lease extensions will be abolished.
- Leases will be extended for a term of 990 years rather than the current 90 years extension and the peppercorn ground rent will continue.
- Leaseholders will be able to buy out the ground rent only rather than being compelled also to extend the term of the lease. (I am not sure of the benefit of this since longer leases will usually have a low reversion in any event so it would make sense for the leaseholder to extend the lease to 990 years at a Peppercorn Ground rent at the time rather than leave the lease on what would be considered a relatively short term).
- There is also discussion in regard to preventing non-statutory lease extensions. This was outside the Law Commission’s brief and there is nothing definite in the recommendations. It would appear therefore that non statutory extensions will continue.
- RIGHT TO MANAGE (RTM)
The main points of the Right to Manage Report are as follows:
- Leaseholders would not be obliged to pay the landlords costs of the RTM process including any tribunal actions.
- The RTM process will be made easier by reducing the number of notices that leaseholders must serve and giving the tribunal power to waive minor mistakes that are made on notices.
The Commonhold Report sets out to re-invigorate the commonhold system. The commonhold option is already in place but has not been used in the last 15 years and there are only 120 commonholds in existence. Leaseholders will be able to convert to commonhold without the requirement for 100% participation.
There will also be new flexibility in the way that commonholds are built and managed and making them more flexible for different types and sizes of development.
If these reforms are adopted, then they will be at least 3 to 5 years away from legislation. In the meantime, of course the lease extension and collective enfranchisement process will continue as it has been and you will have seen our briefing on relativity which for leases above 45 years will mean an increase in premiums.
There has been no detail in regard to valuation methodology and I will keep you
updated once more is known.