The changing leasehold landscape: Government consultation on reforming the leasehold and commonhold systems in England and Wales

The leasehold landscape is changing.  Following proposals made by the Law Commission in July 2020 indicating a major move towards commonhold as the predominant model of home ownership in England and an overhaul of procedures for enfranchisement and right to manage, the Government’s full response has been awaited.

The Government’s initial response to the Law Commission’s reports on commonhold, enfranchisement and right to manage

This time last year, the Government issued a press release confirming the establishment of the Commonhold Council to advise the Government on the implementation of a reformed commonhold regime.  At the same time, the Government announced that where a lease of a house or a flat was extended under the statutory mechanism in the Leasehold Reform, Housing and Urban Development Act 1993, the extension would increase from 90 years to 990 years and the premium payable would be reduced by abolishing marriage value and setting calculation rates.

In May 2021, The Leasehold Reform (Ground Rent) Bill was introduced to Parliament which will reduce ground rents in new leases to zero.  This was part of package of proposed reforms from the Government dating back to 2017 which was separate from the Law Commissions’ review of commonhold, enfranchisement and right to manage.  The Bill is now reaching the final stages of its passage through Parliament and is anticipated to be added to the statue books in the next few months.  For more details about the Bill, please see our insight: A closer look at the Leasehold Reform (Ground Rent) Bill.

Developments and opening of a new consultation on reforms to leasehold and commonhold

The Government has now launched a consultation on a number of the Law Commission’s proposals concerning enfranchisement (right to buy the freehold or extend the lease of a house or a flat) and right to manage.  Our summaries of the Law Comission’s proposals on enfranchisement and right to manage can be found here.  The consultation: Reforming the leasehold and commonhold systems in England and Wales is open until 22 February 2022.

The consultation seeks views on particular recommendations made by the Law Comission, including:

• In mixed-use buildings, raising the threshold of non-residential parts, for a building to fall outside of the scope of collective enfranchisement from 25% to 50%;
• In mixed-use buildings, raising the threshold of non-residential parts, for a building to fall outside of the scope of the right to manage legislation from 25% to 50%;
• Introducing mandatory leasebacks to landlords during a collective enfranchisement claim.  This means that leaseholders would be able to require a landlord to take a leaseback of certain areas and reduce the price payable for enfranchisement;
• Changes to voting rights in right to manage companies to reflect an increase in the threshold of non-residential parts; and
• In respect of commonhold, consulting on the maximum fee for issue of a Commonhold Unit Information Certificate (which is produced prior to the sale of a commonhold unit) and the sanctions to be applied where no fee is paid.

The proposals to raise the threshold of non-residential parts from 25% to 50% would bring more buildings within the scope of collective enfranchisement and right to manage regimes.  There must always be a line drawn somewhere with qualifying criteria but an increase of 25% to 50% is fairly significant.  Where the right to manage is exercised, a right to manage company would not exercise management over commercial parts but where leaseholders collectively purchase the freehold, they will become responsible for managing the commercial parts (subject to any leasebacks (mandatory or otherwise)).  This may mean that leaseholders will become responsible for managing more complex buildings and, if the Government decides to proceed with this proposal, it will require some thought to avoid practical difficulties arising which the appointment of professional managing agents alone will not resolve

On the commonhold side, the consultation appears to set out proposals in relation to one small aspect of commohold concerning the fee payable for a Commonold Unit Informaiton Certificate, which is provided on the sale of a commonhold unit.  Presumably, there will be further details to follow from the Government in due course on the wider recommendations made by the Law Commission and in particular on how it intends to increase take-up on commonhold, which has existed since 2004.  There were a number of hurdles, identified by the Law Commission, to substantially overhaul the current commonhold system including removing the requirement for unanimous consent to conversion of an existing building amongst leaseholders, the freeholder and mortgagees to convert to commonhold and considering whether to introduce compulsory commonhold for new flats or financial incentives for developers to sell properties on a commonhold basis.  However, these have not yet been addressed by the Government.

What next?

The Law Commission’s reports on commonhold, enfranchisement and right to manage ran to over 2,000 pages and made 324 separate recommendations.  This consultation seeks views on a tiny percentage of those recommendations so it appears that we can expect to hear more from the Government in due course. 

In the meantime, we are tracking all developments on our Essential Residential Hub and on our timeline: Changing landscapes in residential leasehold.

For more information on the above please contact Lauren Fraser, Laura Bushaway or your usual Charles Russell Speechlys contact.