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Leasehold and commonhold reform

Published Tuesday, November 6, 2018

This briefing paper considers recent trends in leasehold ownership and ongoing problems associated with the sector. The Government has committed to legislation; on 20 September 2018 the Law Commission published detailed proposals on leasehold enfranchisement and lease extensions. Responses can be submitted up to 7 January 2019. Additional consultation exercises are expected on commonhold and the Right to Manage.

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Leasehold tenure is growing

The Ministry for Housing, Communities and Local Government (MHCLG) estimates that there are around 4.3 million leasehold homes in England, of which 67% are flats and 33% are houses. Overall around 54% of flats are estimated to be leasehold, compared with 8% of houses.

In 2017, around 25% of residential property transactions in England and Wales were leasehold. Because almost all flats sell as leasehold, leasehold transactions are more common in London, where 58% of transactions were leasehold in 2017. The practice is also more common for new-build properties: 42% of new-build transactions were leasehold.

Leasehold houses are rarer. However, leasehold sales of new-build houses increased from 7% of transactions in 1995 to 13% in 2017. Leasehold houses are particularly common in the North West, where 31% of house transactions were leasehold in 2017. There is some evidence that developers were opting to sell new-build houses on long lease agreements as this can represent a lucrative future income stream. However, this practice might have changed ahead of legislation the Government intends to introduce (see below).
  

Leaseholders are owner-occupiers in a landlord and tenant relationship

Owners of long leasehold properties do not necessarily appreciate that, although they are owner-occupiers, they are in a landlord and tenant relationship with the freeholder. The rights and obligations of the respective parties are governed by the terms of the lease agreement, which is supplemented by statutory provisions. The freeholder (landlord) retains ownership of the land on which the property is built. Essentially, long leaseholders buy the right to live in the property for a given period of time.

Problems associated with leasehold ownership

Leaseholders report a whole range of problems, including: high service charges and a lack of transparency over what they are being charged for; freeholders who block attempts by leaseholders to exercise the Right to Manage; excessive costs associated with administration charges and applications to extend lease agreements or enfranchise; and a lack of knowledge over their rights and obligations. The recent trend of developers selling houses on a leasehold basis has been accompanied by lease agreements that set ground rents at a relatively high level and which are subject to regular reviews, resulting in the accrual of significant ground rent liabilities for long leaseholders.

Despite a good deal of legislative actively in this area over the last 50 years, much of which has been aimed at strenghtening the rights of long leaseholders, they remain reluctant to seek dispute resolution through the tribunal system. An unfair balance of power, and potential to become liable for the freeholder’s costs are cited as barriers.

Government proposals to tackle leasehold abuses

The Housing White Paper, Fixing our broken housing market (February 2017), included a commitment to “improve consumer choice and fairness in leasehold”. The consultation paper, Tackling unfair practices in the leasehold market, marked the first step in fulfilling this commitment. The paper included, amongst other things, proposals to tackle the sale of new-build houses on a leasehold basis and to control ground rent levels in new lease agreements. Consultation closed on 19 September 2017 – the process attracted 6,000 responses. A summary of the responses received and the Government response was published in December 2017. In the Ministerial Foreword, the then Secretary of State, Sajid Javid, committed the Government to act on leasehold abuses:

Looking at the responses to this consultation it’s clear to me that real action is needed to end such abuses and create a system that works in the best interests of consumers. And that’s exactly what this government will deliver.

Specifically, the Government has said it will:

  • legislate to prohibit the creation of new residential long leases on houses, whether newly built or on existing freehold houses, other than in exceptional circumstances;
  • restrict ground rents in newly established leases of houses and flats to a peppercorn value;
  • address loopholes to improve transparency and fairness for leaseholders and freeholders; and
  • work with the Law Commission to support existing leaseholders. This will include making buying a freehold or extending a lease “easier, faster, fairer and cheaper.”

The aim was to seek to bring forward solutions by summer recess 2018 and then to legislate “as soon as Parliamentary time allows.” The October 2018 consultation paper, Implementing reforms to the leasehold system in England, includes reference to potential legislation in 2019 “which would be unlikely to complete its passage until mid-2020 at the earliest.”

The Law Commission published proposed measures to help existing leasehold homeowners buy the freehold of their homes on 19 July 2018; a detailed consultation paper followed on 20 September 2018 (see below). The Government published a further consultation paper on Implementing reforms to the leasehold system in England on 15 October 2018 – this consultation is open for six weeks.

Commenting on the Government’s proposals for reform on 21 December 2017, Sir Peter Bottomley said that the announcement had “gone further than people expected, but “it does not cover everything.” Jim Fitzpatrick said:

We will be looking to the Minister for reassurance on the 5 million leaseholders who will not be covered by future regulation and legislation and many of whom are disadvantaged and are looking to the Government to address those concerns.

The Housing, Communities and Local Government Select Committee launched an inquiry into leasehold reform on 24 July 2018 with a focus on the position of existing leaseholders – submissions were invited up to 7 September 2018.

The Law Commission’s 13th Programme of Law Reform

As noted above, the Government said it would work with the Law Commission to support existing leaseholders. The Law Commission’s work in this area is ongoing – the full Terms of Reference have been published. In line with the Government’s request, the Commission is prioritising measures for the owners of leasehold houses and on 19 July 2018, the Commission published proposed measures to help existing leasehold homeowners buy the freehold of their houses. Subsequently, consultation on enfranchisement and lease extensions was launched on 20 September; submissions are invited up to 7 January 2019. There is a full report and a summary document, as well as separate short summaries of what the proposals would mean for leaseholders of houses, leaseholders of flats and landlords. The Commission has said that the proposals amount to “a new, single regime for leasehold enfranchisement designed to benefit leaseholders of houses and flats.” A final report is expected in 2019.

On 4 July 2018, James Brokenshire, the Secretary of State, asked the Law Commission to look at improving the Right to Manage. Work on this 12-month project has begun. A consultation exercise is expected to be launched in November 2018 with a final report scheduled for September 2019.

Commonhold

The Commonhold and Leasehold Reform Act 2002 introduced a new form of commonhold tenure. This form of ownership already operates around the world; for example, the Australian Strata Title system and the condominium system in America.

One of the key aims of the Act was to overcome the disadvantages of leasehold ownership. It was assumed that, once in place, commonhold would become the standard form of tenure for new-build blocks of flats. In practice, it has failed to take-off – there are very few blocks in commonhold ownership. Given ongoing issues associated with leasehold tenure, there have been many calls to review the legislation and implement changes in order to make it a workable and attractive option in England and Wales.

An urgent review is supported by the All Party Parliamentary Group (APPG) on Leasehold and Commonhold (established in 2016). In Tackling unfair practices in the leasehold market, the Government said it would carry out a wide ranging project looking at several issues including “improving commonhold.” In Tackling unfair practices in the leasehold market: government response (December 2017), the Government said that work with the Law Commission would also “reinvigorate commonhold to provide greater choice for the consumer.”

The Law Commission issued Commonhold: A Call For Evidence on 22 February 2018 - submissions were invited up to 19 April 2018. A public consultation exercise is expected to be launched later in 2018 to report in June 2019.

The letting and managing agent market

In October 2017, the Government published Protecting consumers in the letting and managing agent market: call for evidence, responses were accepted up to 29 November 2017 and the Government response was published in April 2018. The process sought views on measures that could be taken to improve leaseholders’ rights in relation to the quality, price, and service provided by management companies appointed by freeholders.

The Government has committed to regulating managing agents in addition to letting agents “to protect leaseholders and freeholders alike”. A Working Group led by Lord Best has been established to develop the regulatory regime. Membership of the Group and its terms of reference were published on 12 October 2018.

Buying a leasehold property

The Government ran a parallel call for evidence between October and December 2017: Improving the home buying and selling process. This paper posed questions about buying a leasehold property with a view to exploring ways in which leasehold information might “be released to a more predictable timescale, more consistently and at reasonable cost.” The outcome was published in April 2018. The Government has said it will set timescales for agents and freeholders to respond to leasehold queries and introduce maximum fees. There is an intention to introduce standard mandatory forms for leasehold information.

Consultation on this issue is included in Implementing reforms to the leasehold system in England which was published on 15 October 2018 with a six week period for responses.

Complaint resolution

A further consultation process, Strengthening consumer redress in the housing market, was launched on 18 February 2018 and ran to 16 April. This process sought views on “better ways for consumers across the private-rented, leasehold, social-housing and owner-occupied sector to resolve their complaints.” One possible model is the creation of a single housing ombudsman service with remit across housing. Responses are currently being analysed.

Housing policy is a devolved matter

The Government’s leasehold reform proposals, if implemented, will only apply in England, although existing legislation does currently apply in both Wales and England. The Law Commission’s consultation paper (September 2018) states:

The extent to which leasehold enfranchisement is devolved to the Welsh Assembly is unclear. Aspects of enfranchisement have, in the past, been treated as a devolved issue. “Housing” was expressly devolved to Wales in the Government of Wales Act.

[…]

Our project, therefore, is intended to cover both England and Wales, and to result, where reasonably possible, in a uniform set of recommendations that are suitable for both England and Wales.

On 6 March 2018, the Welsh Housing and Regeneration Minister, Rebecca Evans, announced that, regarding houses which qualify for support under Help to Buy – Wales, agreement had been reached with some of the larger developers to only sell on a leasehold basis “where absolutely necessary.” On 1 May 2018 she announced that the Welsh Government had formally joined the Law Commission’s leasehold reform project. A multi-disciplinary task and finish group on leasehold reform has also been established.

Scotland operates a separate regime for interdependent units – there are very few leasehold properties in Scotland. Leasehold apartments in Northern Ireland are a relatively recent development. The Northern Ireland Law Commission considered a review of the Law Relating to Apartments in 2013.

 

 

Commons Briefing papers CBP-8047

Authors: Wendy Wilson; Cassie Barton

Topics: Housing, Owner occupation

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