The draft Commonhold and Leasehold Reform Bill, published last month, proposes changes aimed at modernising and strengthening the commonhold and leasehold framework. But a property legal specialist questions whether the government’s well-intentioned plans may be more ambitious than it can manage.
According to the government, the new law is intended to fulfil manifesto and King’s Speech commitments by reforming the commonhold model. It would make it easier for existing leaseholders to convert to commonhold if they choose and ban the use of leasehold for most new flats.
The Bill will also support existing leaseholders by capping ground rents at £250 per year, which would convert to a peppercorn after 40 years, and by removing the threat of forfeiture.
In place of forfeiture, the Bill proposes a new lease enforcement scheme intended to be fairer and more proportionate, applying to both leaseholders and landlords. It will also address similarly strict enforcement powers on estate rentcharges by repealing those powers as they relate to freehold estates.
The government says these reforms are designed to improve the system for the five million existing leasehold properties and their owners, while providing stronger protections for future homeowners in England and Wales. The Bill aims to give homeowners greater security and control over their homes through a modernised and fit-for-purpose commonhold framework.
Jonathan Turner, partner and head of property at Morr & Co, points out that Commonhold itself is not new. It was introduced over 20 years ago under the Commonhold and Leasehold Reform Act 2002.
Indeed, anyone is able to develop new estates as commonhold, or indeed convert existing buildings to commonhold. “It’s just that virtually nobody has done it,” Turner explained.
He continued: “The joke goes that there are more practitioners’ text books about commonhold than there are commonholds. Indeed, the guidance note to the Bill suggests that no more than 20 commonholds were established – less than 200 units.
“Despite the fact that some of the UK’s biggest lenders including Barclays, HSBC and Nationwide already accept commonhold properties for mortgages, it never took off.
“That was not only because it was deemed to have various shortcomings, especially when it relates to mixed-use buildings or shared ownership flats), but moreover because the use of commonhold was voluntary. Especially with the ability for landlords to profit from leaseholds, the industry seemed to prefer to take the ‘better the devil you know’ approach.
“One would hope and expect that the shortcomings in the existing commonhold legislation is not beyond the wit of the legislature to fix. The far bigger challenge will be leaving the ‘devil we know’ at the door and ensuring the industry embraces the new world.
“As has been seen with some of the challenges in dealing with unfair ground rents, dealing with that for new and future developments is, relatively speaking, manageable.
“That, however, does not deal with the estimated five million existing owners bound by the vagaries of leasehold.”
Changing the fundamental legal structure of a building, where each comes with its unique quirks, with varying levels of engagement by leaseholders and third parties, and usually an ambition of keeping fees low, will be a mighty challenge, according to Turner.
He added: “Who will pay the legal expenses for conversion to commonhold? Will all high street or private lenders be required to accept the conversion?
“Does there need to be unanimity between the flat owners? How are the existing freeholder’s interests dealt with?
“These are just a few of the many, many questions that will have to be addressed to convert existing leaseholds into freeholds.
“If these issues cannot be addressed then there will inevitably be a two-tier system of flat ownership, which could have an effect on property values.
“A move to commonhold is a lofty ambition, but one has to question whether it is biting off more than any government could chew.”