You will recall from our previous blogs on the topic of the reform of the leasehold system (that can be found here and here) that the government is keen to implement the recommendations of the Law Commission and make changes that will have a lasting benefit for leaseholders. The first of these reforms to take flight is the abolition of leasehold ground rents, with the legislation to effect this development already making its way through Parliament.

In its consultation entitled “ Reforming the leasehold and commonhold systems in England and Wales” the government is now seeking the views of invested parties on further reforms. Of particular interest are the concept of enfranchisement and the proposed reinvigoration of the use of commonhold as a method of property ownership and these are examined more closely below.

  1. Broadening the scope of enfranchisement – In this context, enfranchisement refers to the right for leaseholders to collectively purchase the freehold interest in their property. The Law Commission's recommendations as to the nature of reform in this area included (i) making enfranchisement rights available to more leaseholders in more types of property, (ii) reducing the costs of making an enfranchisement claim, and giving leaseholders more control over those costs and (iii) making the enfranchisement process less complicated and protecting leaseholders from procedural traps.
    The current law excludes the potential for enfranchisement if non-residential parts of the building exceed 25% of the total internal floor area. In order to increase the availability of enfranchisement rights to a greater number of leaseholders, the government is proposing to increase the non-residential limit to 50% of the total internal floor area (a recommendation originally suggested by the Law Commission). The consultation is looking to understand whether stakeholders would support or oppose such an increase, if they would be likely to make use of such expanded rights, and whether any types of properties should be exempt from the increase.
  2. Mandatory leasebacks – Here we are dealing with a collective enfranchisement scenario where the landlord may be entitled to retain certain units on leases after the leaseholders have acquired the freehold interest, known as a “leaseback”. At present, landlords are able to force leaseholders to grant them a leaseback, but there is no equivalent right that enables leaseholders to compel landlords to take a leaseback. The Law Commission is in favour of creating an equivalent right of this nature as the result is that this reduces the price payable for the enfranchisement by the leaseholders and therefore makes it cheaper for them to acquire the freehold. The government is minded to agree with the Law Commission's approach, but is seeking the views of stakeholders on the introduction of a mandatory leaseback in addition to the broadening of the scope of enfranchisement (as described above).
  3. Commonhold voting rights for shared ownership properties – The concept of commonhold ownership (where owners of units in a shared property, such as a block of flats, take permanent ownership of their home together with an opportunity to participate in the management of the common parts of the property) has not taken off in England and Wales, despite the legal framework supporting it now having been in place for 20 years.
    The government wants to “reinvigorate commonhold” by supporting its use in as many settings as possible. At present, shared ownership leases (where homeowners buy a share of a property and pay rent on the remainder until it owns 100% of the property) cannot be offered in a commonhold scheme. However, as part of this consultation, the government is examining whether shared ownership properties could be brought within such schemes, and in particular, how the voting rights that would be exercisable within a commonhold association would work where there are shared ownership leases involved, and there is a “division” in ownership until such time as the homeowner acquires the entirety of the interest in its property).

Note that the above topics represent the most significant reforms from the consultation, but there are other, related changes that are also proposed, including reforms to the provision of information for the sale of a commonhold property, and consequential amendments to voting rights in right to manage companies to enable leaseholds to have control over decisions made under a right to manage scheme.

Whilst the benefits of these proposals for individuals who are seeking to exercise more control over the property in which they live and in which they have invested their equity may be obvious, there is perhaps more uncertainty for other stakeholders, such as developers of mixed-use schemes who will still want to retain a significant degree of control over how the scheme is managed and run in order to maximise their return for their shareholders. Theoretically, what is beneficial for one, should also be beneficial for the other, but the balance of power is nuanced and will need to be carefully managed. It is not necessarily the case that the investment developer (say) of a large mixed-use scheme will have interests that are aligned with a component residential block, owned as commonhold, when dealing with matters such as standards of repair and decoration, and enforcement of other matters that would otherwise be leasehold covenants for flat owners (e.g. as to restrictions on use etc.).

Alongside the detail of the reforms, and commonhold itself (even in its current state), is the central question as to how it is viewed by lenders. This is important both for a developer seeking debt funding for the larger scheme, and individual flat (“unit”) purchasers seeking a residential mortgage. At present, the (almost) total lack of existing tested commonhold schemes means that any move to promote this approach to property ownership will need to be carefully considered. Otherwise, lenders may not be satisfied that the value of the scheme as a whole or an individual flat, in the long term, is entirely secure or that there is some element of risk that then needs to be priced in.

The consultation is open until midnight on 22 February 2022.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.