Leasehold Home Ownership

 

Summary of Law Commission’s Recommendations for Reform

Home ownership in England and Wales is set for a historic shake up. Leaseholders are likely to find it easier, simpler and cheaper to buy their freehold, extend their lease and/or buy out ground rents. 

Landlords face the prospect of leaseholders having the right to extend their leases for 990 years. Ground rents will be extinguished as soon as the lease is purchased rather than 2 years later as now and will be prohibited for new leases. This will in effect abolish ground rent income for new developments and as a result developers will need to reconsider their structuring and exit strategies. An increased use by developers of resident controlled management companies to exit developments and their constitution, will be important for the successful handover of developments to residents especially where the residents may not wish to be company directors in light of the increasing complexity of the role and/or buildings to be managed.

The Ground rent shake up has already commenced with the roll out of the Government’s new Help to Buy Scheme which replaces the existing Help to Buy Scheme and is intended to run for two years commencing on 1 April 2021.  Leasehold Apartments utilising the new Scheme must be sold at a zero ground rent and leasehold houses are (with very limited exceptions) ineligible for the Scheme. 

More generous enfranchisement rights for leaseholders are also proposed. They would mean that buildings having just 50% residential space (compared with the currently required 75%) could be bought out by the residential leaseholders. Landlords would effectively also be obliged to take leasebacks of some flats to reduce the premium payable. 

Under the new proposals, leaseholders could also become entitled to buy out a whole freehold estate or to take over its management, including any commercial or retail areas. At the moment, leaseholders only enjoy these rights on a block by block basis.

These changes therefore raise the real prospect of amateur landlords attempting to run complicated, mixed use developments. This is unlikely to be viewed with relish by a sophisticated office tenant or nationwide retail occupier. To avoid this risk, landlords might well look to reduce the residential space in a scheme to below the new 50% threshold.

The Law Commission’s preferred tenure for apartment blocks is clearly commonhold, with a view to ultimately phasing out the existing residential leasehold system. The 1000 year old leasehold system would be replaced by ‘forever’ flats with no landlord and an easier route to convert from leasehold to commonhold.

However, commonhold has been available since 2003 and is rare for a reason. Commonhold still faces a number of substantial challenges. Mortgage lenders are still struggling to get comfortable with the concept of commonhold and the property management obligations that it brings to owners.

These reforms will have a radical impact on millions of ordinary landlords and leaseholders. They could also have a dramatic and complicating effect on institutional residential asset classes, including build to sell, senior living and mixed use developments.

The above is based on recommendations made on 9^th January and 21^st July 2020 and the Government’s announcement made on 7^th January 2021. Draft new legislation is not expected until next year and so naturally the final piece of legislation could (when enacted) depart from these recommendations. 

If you would like to discuss any aspect of this summary note, please do not hesitate to contact us.

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