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29/11/2019

Legal landscape: Leasehold reform - better or worse?

The notion of leasehold reform has gained traction with the government, but will it actually happen and could it pose unintended consequences? asks Claire Hamilton

The right to purchase the freehold

The Law Commission says leaseholders “should be entitled to acquire the freehold to the whole of the building within which their leasehold premises are situated, even if the existing lease is of less than the whole of that building".

This would seem to present little change, and where enfranchisement rights have been exercised in relation to the whole or part of an estate, it can actually be disadvantageous to the leaseholders. What happens to the contributions towards estate roads and services which are likely to fall into disrepair? We’re seeing more disputes between residential occupiers who are turning their inexperienced hands to managing estates. This is not just a problem for current occupants, but for future purchasers; lenders will be unwilling to lend on properties on the estate.

For the developer, if the estate is part enfranchised and part not, they’re left managing an estate containing both leasehold and freehold units and difficulties collecting repair contributions. At worst this could see the developer going into administration.

“Developers will be looking at their post-construction exit strategy with a very sharp pencil”

The Law Commission has acknowledged that these problems can arise where an estate management scheme has not been created, but has not yet offered a palatable solution. It has proposed that any obligation owed to a landlord of an estate by a leaseholder who has acquired the freehold of their premises should be enforceable, whether or not the landlord has retained land that benefits from that obligation. The Law Commission also suggests that unpaid sums due from a leaseholder who has acquired the freehold of their premises could be charged and enforced by the landlord as if he or she were a mortgagee. But how would this be funded and registered if the leaseholder already has a mortgage? Why should a developer rank second to collect its maintenance costs to a mortgagee they didn’t choose? Would lenders be likely to accept this position?


In brief

  • The Law Commission’s consultation on leasehold reform suggests changes to the right to purchase freehold and the right to a lease extension. 
  • Developers may find themselves incentivised to transfer the freehold to leaseholders as soon as possible post-construction. 
  • The Commission’s suggested simplifications may have unintended consequences and not help in their aim of solving the housing crisis.

The right to a lease extension

Qualifying leaseholders are already entitled to be granted an extended lease of their house or flat, although there have been criticisms that the process is overly complex. The Law Commission has suggested there should be one uniform right to unlimited lease extensions, available on the same terms to all leaseholders, regardless of whether they are dealing with a house or a flat. The Law Commission had also proposed that the right should be a right to a fixed additional term at a nominal ground rent (although the government has since announced it wants to abolish ground rents entirely).

While extending a lease can be advantageous to tenants, it does not make management of the estate simple for the developer landlord who is left with leases determining at different times and with varying rent provisions.

"Simplifying any process is always welcome, but extending entitlement to enfranchisement and lease extensions is unlikely to go any way to solving the housing crisis"

Having an eye on simplified lease extensions and freehold acquisitions, developers will be looking at their post-construction exit strategy with a very sharp pencil. They will no doubt consider a mechanism for transferring the freehold to leaseholders as soon as possible to get rid of the management headache. It is likely a sensible developer will consider uplifting the price of each flat, promoting a ‘free’ share of the freehold. This may sound attractive, but flat owners will have to perform the landlord covenants. This could lead to a lower quality of services than those provided by experienced developer landlords. It could even lead to breaches of legislation – a concern given the health and safety issues in multi-occupied buildings.

Simplifying any process is always welcome, but extending entitlement to enfranchisement and lease extensions is unlikely to go any way to solving the housing crisis.  

Claire Hamilton is a partner at UK law firm TLT

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