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Abolish leasehold
On 29 January 2023, Housing Secretary Michael Gove announced on Sky News that the Government wants “to introduce legislation in the final parliamentary session – later this calendar year – in order to change the leasehold system“.
That statement is in line with the Government’s announcement earlier in this parliament that they want to change the lease extension, enfranchisement and right to manage procedures. That includes reducing the premium payable for a lease extension. However, Mr Gove then went further, suggesting the Government wanted to abolish leasehold entirely.
Such a step would represent the greatest single change to property ownership in a century. In comparison, legislation such as the Leasehold Reform (Ground Rent) Act 2022, which abolished ground rent on most new leasehold properties, would seem little more than tinkering around the edges.
What would replace leasehold?
Mr Gove did not go as far as to suggest what might fill the vacuum created by leasehold’s demise. However, the heir apparent – commonhold – has been patiently waiting in the wings since its creation in 2004.
Commonhold was the first new type of property ownership created in nearly eight decades and is seen by many as the solution to the multiple ills of long leaseholds. But following much hype, commonhold promptly fell flat on its face. Fewer than 20 schemes and only 150 units were ever registered.
What is the commonhold framework?
In a commonhold building or estate, you own the freehold of your flat or house (referred to as a ‘unit’). Owning the freehold means there is:
- no limit on how long you own the unit;
- no restriction on selling or transferring the unit; and
- no risk of forfeiture.
The rest of the building or estate forming the commonhold is jointly owned and managed by the unit owners through a commonhold association. An association may decide to appoint a managing agent to assist with management.
In so many ways, commonhold is the perfect successor to leasehold. So, why did it fail to take off?
A major reason was that mortgage lenders proved reluctant to lend on commonholds, citing concerns over the potential insolvency of commonhold associations, which are companies limited by guarantee. Also, commonhold was not attractive to developers benefitting handsomely from leasehold income streams such as ground rents and extension premiums.
The Law Commission
In July 2020, the Law Commission published a “Package of reforms to transform the future of home ownership in England and Wales“. High on their list was “reinvigorating commonhold“.
To achieve this, the Government will need to make commonholds more appealing to lenders. However, more perhaps more problematic would be the conversion of existing leasehold properties to commonhold to avoid a twin-track system of property ownership. But for several reasons, that’s unlikely to prove universally popular among leaseholders. Those reasons include:
- It’s the responsibility of the members of the commonhold association to enforce the rules of the commonhold agreement/community statement. But that could easily result in tension between members.
- Converting a property to commonhold can be expensive and complicated.
- The loss of ongoing income streams will mean commonholds are more expensive than leaseholds.
- With such a new type of property ownership, there will be unforeseen legal problems. Some of these will inevitably need testing in the courts, taking many years.
What to expect
Little more than a year from a general election, it’s questionable whether the Government currently has the appetite to steer such a seismic piece of legislation through parliament. And, notably, no timeline has been announced to either abolish leasehold or introduce widescale reform. Nevertheless, there’s clear cross-party consensus for action. On balance, it’s more probable that leasehold reform – in a variety of guises – will feature large in party manifestos, rather than being a priority in advance of polling day.
Ultimately, however, it seems likely that residential leasehold, certainly in its current form, is on borrowed time. But whether its life expectancy is five years or twenty is currently impossible to say.