Can the Draft Commonhold and Leasehold Reform Bill deliver on its objectives?

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Can the Draft Commonhold and Leasehold Reform Bill deliver on its objectives?

We now have the Draft Commonhold and Leasehold Reform Bill. It is not yet in final form and there may be some changes following consultation until late April.

However, we now have some certainty that the government plans for commonhold to become the default tenure for new flats, to cap ground rents in older leases, to abolish forfeiture and to make it easier for existing blocks to convert. It is likely these key changes will remain in some form in the final bill.

As a member of ALEP, I welcome reform to the existing system. There are many flaws in the leasehold system and commonhold in its current form is not massively appealing.

However, I also want the government and wider audiences to understand the risks attached.

We have lived through the difficult parliamentary passage and partial implementation of the Leasehold and Freehold Reform Act (LAFRA) which was ultimately rushed.

The media coverage didn’t help, creating confusion particularly about what was in force.

Reform is necessary, but it must be workable, evidence based and meaningful consultation with the professionals who will have to run it day to day is crucial.

There are four main changes which underpin Parliament’s continued intention to address the imbalance in this feudal system and deal with the great dissatisfaction experienced by many leaseholders.

The proposed ground rent cap

The ground rent cap – £250 per year for 40 years and then a peppercorn – is designed to tackle the ground rent scandal, particularly the cases involving doubling rents, aggressive escalation clauses and situations where leaseholders were effectively trapped because their leases became unmortgageable.

From that perspective, the reform is a welcome correction and will give many leaseholders long overdue relief as well as greater confidence for lenders.

However, the cap creates a different set of issues for leaseholders who have already acquired their freehold.

Many of them paid a premium that reflected the capitalised value of the ground rent, especially where the rent exceeded £250 or was due to escalate beyond that level.

They effectively compensated the outgoing freeholder for the loss of that income stream.

If the legislation now removes or caps that income, they are left with an asset that is worth less than they paid for.

There is a further fairness concern where not all leaseholders participated in the freehold purchase.

The participating leaseholders often had to fund the non-participants’ share of the premium. Under the proposed cap, the non-participants benefit from reduced ground rent without having contributed to the original acquisition cost, while the participating leaseholders absorb the financial loss.

The value impact will vary. Where participating leaseholders have already extended their leases to 999 years at a peppercorn, the loss of ground rent income may not materially affect their own long-term position.

But for those who relied on the ground rent income to offset the enfranchisement premium – or who expected to recover that value on resale of the freehold interest – the cap will reduce the value of their asset.

Parliament did consider this impact but did not propose any sort of compensation to address this issue.

In short, the reform addresses the ground rent scandal for many leaseholders, but it does so at the expense of those who enfranchised early and paid for the very income stream the legislation now proposes to remove.

Forfeiture for long residential leases

Second, the proposal to abolish forfeiture for long residential leases is a long overdue rebalancing of rights.

Replacing forfeiture with a statutory enforcement regime that preserves effective remedies but introduces judicial oversight should finally remove the cliff edge risk that has overshadowed service charge disputes and breach allegations for decades.

The complexity of mixed use

Third, the Bill makes a serious attempt to render commonhold workable in the types of schemes we actually build.

The introduction of “sections” and separate cost heads is aimed at managing the complexity of mixed-use developments.

The concept of “permitted leases” is designed to accommodate shared ownership products and certain home finance structures.

That willingness to engage with the messy reality of modern development patterns is a welcome shift from the more idealised versions of commonhold seen in earlier legislation.

The consent threshold

Fourth, the Bill tackles conversion more directly than before.

Reducing the consent threshold from 100% to 50% is a significant change, and the draft sets out a mechanism for bringing non consenting leaseholders within a harmonised framework of rights and obligations.

If commonhold is ever to move beyond a niche tenure, conversion cannot depend on unanimity; the Bill recognises that and attempts to provide a workable pathway.

Uncertainties remain

The risks are mostly operational, and these can be summarised as three specific concerns.

The first is timing and transition.

The effective ban on new leasehold flats is tempered by consultation on exemptions and transitional arrangements.

Getting that wrong could disrupt housing delivery and lender confidence.

Developers need a tenure that is fundable, saleable and durable.

Lenders need predictable security and enforceable remedies.

Purchasers need clarity on liabilities and governance.

The second is capacity and familiarity.

Many solicitors, managing agents, valuers and lenders have never worked with commonhold.

With fewer than 20 developments registered since its introduction more than 20 years ago, there has been limited opportunity to gain practical experience.

If commonhold is to become the default, training has to be treated as infrastructure, not an optional extra.

It needs to cover structures, processes, dispute resolution and the practicalities of coordinating large groups of leaseholders through conversion.

And the third is legal challenge.

ALEP has already flagged the risk of Human Rights Act arguments around the ground rent cap and “sunset” approach.

Advisers should assume litigation risk, particularly where investment valuations and long term income streams are in play.

Conversion itself will also remain hard, even with a lower voting threshold.

Leaseholders will generally need to acquire the freehold first and then convert.

Cost, timing and complexity will still bite where there are mixed use sites, defective leases, missing landlords or fragmented interests.

This is not all negative, however.

If commonhold becomes mainstream, advising may become simpler.

Commonhold community statements should operate in a similar way to leases by setting out rights, obligations and liabilities.

As largely prescribed documents, there should be less scope for interpretation.

Many of us would accept that leases, with their legalese, are not always easy to understand.

Key considerations for landlords from a legal perspective

Over the consultation period and through pre-legislative scrutiny, I will be keeping an eye on five things on behalf of landlord clients.

• Regulations and guidance: especially the Commonhold Community Statement, local rules and enforcement mechanics
• Safeguards in the lease enforcement scheme: thresholds, remedies and the route to sale
• Treatment of non-consenting leaseholders: workable decision-making with fair protections
• The new build transition: exemptions, timing and lender and consumer response
• Professional readiness: training, lender policy, consumer education and a forum to keep implementation grounded

The Bill is ambitious, and that is appropriate given the scale of the issue.

The risk is that rushed detail creates uncertainty and the people the reforms are meant to help carry the cost.

My hope is that government uses this draft process properly, works with practitioners and produces a final Bill that is not only principled but operable.

Shabnam Ali-Khan is a partner at Russell-Cooke and a member of ALEP (Association of Leasehold Enfranchisement Practitioners).

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