The Law Commission’s leasehold reform proposals would be positive for social landlords

Commonhold as the preferred alternative to leasehold ownership

There has been limited uptake of commonhold since its introduction 16 years ago: less than 20 commonholds have been established. The essence of commonhold is the freehold ownership of flats by owners, who together make decisions about the management of their development.

Our recommendations ensure commonhold works for modern developments in a way that it currently does not. For example, our recommendations enable shared ownership leases to be granted within a commonhold development, which is presently impossible. But we recognise that improving the law is not enough. For commonhold to take off, the government would need to mandate or incentivise it.

If commonhold flourishes, social landlords can expand on the homeownership solutions they provide. Using commonhold would enable social landlords to develop homeownership schemes for which they would subsequently not need to incur the costs and resources that management entails.

Social landlords have steadily moved away from holding masses of stock. Using commonhold may assist social landlords in planning development initiatives with the short to medium-term objective of disposing of their interest once residential units pass into homeownership.

Making enfranchisement and RTM acquisition quicker, easier and cheaper

Enfranchisement, whether in the context of freehold acquisition or lease extension, is presently a cumbersome and complex process. We recommend streamlining and improving leaseholders’ enfranchisement rights, enabling qualifying leaseholders to seek a lease extension for 990 years, at a peppercorn rent.

We also recommend the removal of obstacles such as the two-year ownership requirement and a liberalisation of qualifying criteria. For example, as requested by the government (and enshrined in our terms of reference), we make recommendations to enable shared ownership leases to qualify for lease extensions. Collective freehold acquisitions will be possible where up to 50% of premises are commercial and over multiple buildings. Recommendations to simplify the claim process by removing procedural traps and facilitating earlier resolution of any disputes have also been made.

In our report Leasehold Home Ownership: Buying your freehold or extending your lease, published on 9 January, we set out options available to government for reducing premiums and simplifying the way in which premiums are calculated.

The current methods of valuation often lead to arbitrary and unpredictable outcomes and have been criticised for being artificial and circular. Disputes as to premiums payable are all too common as a result. This report also considers the possibility of creating an online calculator for leaseholders and landlords to use in order to obtain a premium valuation with ease.

Depending on how the government elects to proceed with valuation reforms, leaseholders may or may not be liable to pay the non-litigation costs of the landlord. If the government adopts a market value based model, then we recommend that the landlord and leaseholder should meet their own costs, with some exceptions.

If the government elects a model that is not broadly market based, then we recommend that leaseholders would need to continue to contribute towards the landlord’s non-litigation costs but on a fixed-fee regime, which would provide both parties with certainty. We also make recommendations to lessen the financial impact on landlords of repeated failed claims through seeking an enfranchisement restraint order from the tribunal (the First-tier Tribunal (Property Chamber) in England and the Leasehold Valuation Tribunal in Wales).

Our recommendations would mean that social landlords can process enfranchisement claims efficiently and cost effectively. A simplified valuation method for premiums means that social landlords would not have to expend lots of time calculating the premium payable and would be less likely to become embroiled in valuation disputes. Our recommended approach to non-litigation costs will mean that social landlords need to consider carefully how enfranchisement claims are handled to ensure cost efficiencies.

The law on the right to manage has been criticised as being restrictive and as setting out a flawed, unpredictable and costly claim process.

Our recommendations to improve RTM include lifting some of the qualification restrictions, eg premises with non-residential areas of up to 50% would qualify, as well as shared ownership leases. Multi-building RTMs should be possible and greater support and freely provided training should be made available to RTM company directors. Information should be provided early to enable adequate preparations for acquisition of management functions. We also recommend streamlining the claims process. Neither leaseholders nor the RTM company would be liable to pay the landlord’s non-litigation costs.

Fundamentally, we make recommendations that would resolve the issue of RTM companies automatically acquiring non-exclusive appurtenant property further to the decision in Gala Unity Limited v Ariadne Road RTM Co Limited [2012] EWCA Civ 1372. Management functions over such property should only be acquired if the landlord does not object or the Tribunal makes a determination to this effect.

The recommended changes would make it easier for landlords to process RTM claims, as many avenues of dispute would be removed. However, social landlords would be wise to invest in procedures to facilitate handing over management, to reduce costs which would no longer be recoverable.

Professor Nick Hopkins, law commissioner for property, Law Commission and Bridget Stark-Wills, lawyer, Law Commission