Leasehold Reform: A Step in the Wrong Direction
Richard Snape, a leading authority and presenter on both commercial and residential conveyancing matters, provides his views on the reformation of residential leases.
On 7 January 2021, the Ministry of Housing, Communities and Local Government published a press release on their plans to reform residential leases and to introduce legislation in this parliamentary year. It proudly announced that this would constitute the greatest change to property saw in forty years. I must admit that I have racked my brain as to what was so important in 1981 and there is not a single thing, or 1982, 1983, or 1984.
The first change will be that leaseholders of flats and houses will have a right to extend their lease for 990 years, not as currently 90 and 50 years respectively. In fact, for a flat, the Leasehold Reform Act 1993 allows two extensions each of 90 years. In relation to a house there is a statutory right under the Leasehold Reform Act 1967 to buy the freehold after two years. Why someone wanting to gain control of their property would want to purchase a long lease rather than the freehold, save in exceptional circumstances, I find difficult to understand. The press release also states that when a lease is extended, the leaseholder will no longer have to pay any ground rent. This has always been the case with statutory extensions under the Leasehold Reform Acts.
In December 2019, the Government announced that ground rents in new leasehold dwellings would be abolished, but not retrospectively. In fact, high and escalating ground rents, admittedly with exceptions, are becoming a thing of the past. On 10 December 2020 five of the major builders announced that they would dispense with ground rents other than peppercorn and on 1 April 2021, when the new Help to Buy scheme comes into force in England the developer will not be able to take part in the scheme if there is a ground rent.
Likewise, with the exception of shared ownership, leasehold houses will not be able to be sold. Again, this will not be retrospective and with some exceptions developers stopped selling leasehold houses several years ago due to the adverse publicity they were generating.
The Government is also setting up a Commonhold Council to promote commonhold developments. Commonhold was introduced in 2004 and there are fewer than 20 commonhold developments and some 150 units in the whole of England and Wales. The majority of mortgage companies will not lend on commonhold, but the Government intends to incentivise them. There are good reasons why the mortgagees will not lend, not least the fact that they have less security as commonhold units are deemed to be less valuable. The Law Commission has suggested that the security might include common parts and services, but this will not help as these have no intrinsic worth. There is also a major problem in relation to insolvency. Each unit holder must become a member of the commonhold association and be limited by guarantee of a pound sterling. Currently, there is no obligation for the association to take out public liability insurance although this may change. The insurers are reluctant, for the reasons above, to insure.
The next problem is that a residential commonhold unit holder cannot lease out their unit, although the Government intends to make an exception for shared ownership leases. At the end of 2020 15% of the residential conveyancing market involved buy to lets (in the West Midlands 22%). By removing a large part of the market there are major implications in relation to the value of the unit.
For me the major problem, however, is that the commonhold association is nothing more than a residents’ management company under any other name with all the unit holders required to be numbers. Any conveyancer will be aware of the problems caused by resident management companies, especially where they do not have an effective managing agent. The first property that I ever bought was a flat in a townhouse conversion in Bristol where were three other flats in the building and the block was effectively managed. Even then I remember the problems in trying to arrange an A.G.M. and decided to sell rapidly. The Government seems to think that what a small number of people are unable to achieve, 100 or more will have no problems within a large development. The commonhold association is a company and will have to fulfill the same Companies House requirements as a resident’s management company.
The final nail in the coffin of commonhold is illustrated by a story I heard when talking about the subject in Bournemouth back in 2004. A solicitor told me how they had been called to talk to the members of a retirement development on the coast. After several minutes an irate woman stood up and said to the solicitor, “You are aware that you are talking to the members of an exclusive retirement development in Bournemouth. Do you really think that people like ourselves would ever wish to become common.” Perhaps, the other change the Government may consider is to change the name from commonhold to exclusivehold.
Rather than pursuing this dead end the Government could pass legislation reversing the disastrous decision in Austerberry v Oldham Corporation (1885) and allow positive as well as restrictive covenants to bind third party purchasers in freehold land. This would be a much better solution and also solve all the problems being caused by estate rentcharges in freehold developments. Admittedly, effective management would still be required but this will always be a necessity when people are living in close contact with one another in the same building, sharing the same services and common parts. One thing the Government can do to make this better is to overall the tribunal systems and also allow freeholders as well as leaseholders to question the reasonableness of administration charges.
To quote Einstein, which I rarely do, “The definition of insanity is doing the same thing over and over and expecting different results.” There are many things that the Government could do to make home ownership (and also a conveyancer’s job) easier. A revamped commonhold is not amongst them.
Richard Snape January 2021
DISCLAIMER: Nothing said in this article constitutes legal or other professional advice and no warranty is given nor liability accepted for the contents of this article. Richard Snape, Davitt Jones Bould and LawSure Insurance will not accept responsibility for any loss suffered in consequence of reliance on information contained in the article.