No holds barred: the future of long leases

Just before Christmas the government announced that legislation will be introduced to change the law on long leases of houses and flats in a so-called “crackdown on unfair leasehold practices”. Estimates on the numbers of leasehold properties vary from 4-5m. The Law Commission has also announced that its 13th Programme of Law Reform will include a review of commonhold and residential leasehold law. Such issues attracted much comment during a commission consultation last year, and it will focus on three main areas: i) commonhold – why has it failed?; ii) enfranchisement and new lease claims – what can be done to make it easier for leaseholders to exercise rights?; and iii) reforming the laws relating to managing agents. Leasehold houses Although houses are usually sold freehold and flats leasehold, the number of leasehold houses has increased in recent years. The government believes that some developers sell houses leasehold as they retain the right to receive a ground rent under the lease, a valuable investment that can be sold on. As matters stand, there is no right of first refusal (under the Landlord and Tenant Act 1987) for house lease sales so a developer can sell the house leasehold and then sell the freehold (with its right to the ground rent income) to an investor. True, a house leaseholder can enfranchise and buy the freehold (under the Leasehold Reform Act 1967) but many such leaseholders may be put off by the costs of paying the premium and the landlord’s professional costs. Ground rents Some leases allow for the ground rent to be reviewed over the years with the rents increasing dramatically. This and other practices attracted epithets such as “feudal” in the government’s announcement. Its conclusions were fortified by the results of a survey with some 6,000 respondents, most of whom expressed disquiet over the current system. What will the legislation cover? So what are the legislative plans? First, it will be no longer possible to sell houses leasehold in most cases (shared ownership leases of houses will continue to exist, but in the great majority of cases sales of houses must be freehold). Second, ground rents for new sales of leaseholds will be set at zero. This will only apply to new leases of both houses and flats. This could lead to lower premiums being paid for enfranchisement and new lease claims of both houses and flats (and it may have consequences for commonhold). The government also announced that it will be writing to all developers to strongly discourage the use of Help to Buy: Equity Loans for the purchase of leasehold houses in advance of legislation and to ask those who have customers with onerous ground rent terms to provide them with some redress. The legislative announcement also refers to ways of improving access to dispute settlement for leaseholders who are dissatisfied with the management of their block of flats. The government will work with the Law Commission on the laws relating to residential leases and commonhold. Commonhold Commonhold is the long-term alternative to the leasehold system (for residential, commercial and mixed-use developments, though the main focus so far has been on residential commonholds). Introduced by Part I of the Commonhold and Leasehold Reform Act 2002 (the 2002 Act), it has been in force since September 2004. It allows for freehold ownership of units such as a flat or an office, which form part of an interdependent building. Each unit holder is a member of a commonhold association which owns the common parts and which manages the development. In other words, there is no external landlord and the unit holders have a freehold interest in their units. Currently the basic principles of commonhold are set out in the 2002 Act while the detailed regulations, such as the rules of the commonhold (known as the commonhold community statement (CCS)) and the constitution of the commonhold association are set out in various regulations made under the 2002 Act. Commonhold is based on the experience of “strata title” where similar systems have functioned successfully for decades (such as in Australia, the US and Canada). But in England, despite its perceived advantages over the leasehold system, it has flopped. Why has this happened? Experience has shown that some of the commonhold provisions probably need statutory revision. The standard CCS, for example, does not cater well for a mixed-use scheme where different assessments for the residential and non-residential sections of the building will be necessary. Lenders have expressed concerns over the consequences should the commonhold association enter into liquidation. These and other concerns will presumably be expressed to the Law Commission as it examines the legislation and any shortcomings it may have. Developers are key But perhaps the greatest impediment to commonhold being embraced by the property market is that developers make their profit not only on the sale of the flats, but also on the income from the ground rents payable. This income may increase over time under the rent review clauses in the flat leases. And it is a profit that can be realised on the onward sale of the freehold to the block. Is it any wonder that developers have shunned commonhold where there is no ground rent income? Strictly speaking a commonhold unit should command a higher price than a comparable leasehold unit as a purchaser is acquiring a freehold. But that is not the way the market has seen it so far, and the traditional freehold/leasehold form of development continues to dominate the housing market for flat sales (and for some leasehold house sales). This may change if the government keeps to its promise of introducing a ban on ground rents for new sales. As the lure of the ground rent starts to recede, some developers, at least, may consider using commonhold for new developments. James Driscoll is a solicitor and a writer