John Stephenson, Partner at BDB Pitmans, comments:
As I write, all we have is a press release from the Ministry of Housing, Communities and Local Government headed “Government reforms make it easier and cheaper for leaseholders to buy their homes”, so we know the aim of the reforms, but detail is scarce. We know that once implemented, the statutory lease extension for flats will move from being 90 years on top of what is now unexpired to a top-up to 990 years, at of course a nil (peppercorn) rent, and the same right will now be available for houses. We know that all new leases of retirement homes will be at nil rents (though this does not affect service charges, nor heavy fees often payable on sale of such homes), and this may apply to all new leases, though this is not so clear. Perhaps the reforms will remove the “assured tenancy” trap in some leases with rents over £250pa. But what else will the reforms achieve and in what order?
We know from the press release that there will be two Bills brought before Parliament, one in the upcoming session and the other, one assumes, in 2022. The first of these will contain proposals to set new lease ground rents to zero (note that the comment from the Law Commission in the press release did not confine this to retirement homes), presumably for long leases only, the usual minimum term for a long lease being 21 years. The second part of what the Law Commission described as “seminal two-part reforming legislation in this Parliament” will follow and is likely to contain more of the Law Commission’s recommendations in their 2020 Report1.
The Law Commission’s comment on the proposals highlights the lease extension right to 990 years and a statutory multiplier to limit the element of the premium required to buy out the ground rent. In another blow to professional valuers in this field, it is also proposed to abolish “marriage value” (the sharing of the new value created by the transaction over and above the combined values of the previous interests) in favour of a formula, probably related to the agreed market value of the freehold, which means that arguments over relativity (the proportion of the current leasehold to freehold interest) will be a thing of the past too. Other recommendations, so far unspecified, may be included.
All these reforms will have an impact in the relatively short term. However, the long-term intention of the Government to abolish residential long leasehold (and it may take half a century, so no breath need be held) is signalled by the intention to establish a Commonhold Council to reinvigorate this ugly duckling of property tenure, which has been available since 2003 and used in only a handful of cases to date.
Robert Jenrick comments that the Commonhold Council will be, “a partnership of leasehold groups, industry and government that will prepare homeowners and the market for the widespread take-up of commonhold…..Blocks are jointly owned and managed, meaning when someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too”
Up to a point, Mr Jenrick is correct. Commonhold is a special form of freehold tenure of flats, not limited by years, with a commonhold association, which looks remarkably like a tenants’ management company, responsible for the structure and common parts, and funded by what are service charges by any other name. It is fair for the Government to say that we are one of the very few countries which has leasehold tenure and that almost all others have some form of “strata title” system; but whether even what is known as “Commonhold 2.0”, whatever form that will take, will overcome the innate conservatism of developers, property investors and above all lenders, who may prefer the leasehold devil they know, is another matter. There will need to be incentives, I suggest, for new blocks of flats to be sold on a commonhold basis, or for existing blocks to convert to commonhold.
These reforms should not only remove some of the worst abuses of the leasehold system, notably penal ground rent escalators in leases, but also make shorter leases, those below 80 years which currently pay marriage value on an extension, much more marketable as being easier and cheaper to extend. The draft Bill once published will put a lot of flesh on these bones; then we will see if the detail justifies the current excitement.
John Stephenson (johnstephenson@bdbpitmans.com) is a Partner at BDB Pitmans. All views expressed are his own and not those of the firm.
[1] “Leasehold Home Ownership: Buying your freehold or extending your lease” Summary Law Com No 392 21 July 2020