23 Feb 2021 | Leasing and Commercial

The road towards leasehold reform

The Government’s leasehold reform agenda has often stuttered over the past few years, along with most other domestic policy issues, as getting Brexit done and then the pandemic has taken priority. Pressure had therefore been growing over the tail end of 2020, with hardly a day going by without a question from parliamentarians querying the slow progress?

On the 7th January, all that changed with a Government statement which tried to allay backbench frustrations. In some respects, what the statement lacked in detail it sought to make up for in impact, with measures that went far beyond the manifesto commitment to cap future ground rents at a peppercorn, and to set out a roadmap towards broader leasehold reform.

The Government’s approach is therefore effectively now two-speed. An initial Bill, which will deliver on the manifesto commitment, in the next legislative session, with a Queen’s Speech expected somewhere in the period May to July 2021. A far wider programme of reform will then follow, perhaps in the parliamentary session after that, and therefore 2022/23.

Of particular concern to us and the sector is the proposal to abolish ‘marriage’ value. In fact, marriage value cannot be abolished as such, and what is in effect being proposed is an appropriation of landlords’ share. As the Law Commission acknowledged in its report on leasehold valuation, whether that is legal is open to question under human rights law? It is difficult to see how an issue which started with the inappropriate use of leasehold on new houses, has come to the point where those who have traditionally invested in the sector are deprived of fair value for their holdings, and to leap from reform of the methodology of valuing leasehold interest to total confiscation of a part of it. In the process in some cases transferring wealth to speculators and other short-term investors, and taking it away from charities, pensioners, and long-term investors in place.

So far as longer-term reform is concerned, this will draw heavily on the work of the Law Commission and its reports on Leasehold Enfranchisement, Commonhold and Right to Manage. It was the will of Parliament in 2002 to deliver a workable commonhold system and yet nearly 20 years on, its use remains sparse. Part of the reason is legislative design, but there is also an issue as to whether developers and mortgage lenders have sufficient incentive to adopt commonhold or sufficient disincentive not to adopt leasehold. The Government is conscious of this, but in seeking to move to a regime that far more favours commonhold, will have to be careful it does not blight the homes of the many millions of existing leasehold homeowners.

In terms of policy design, we have two keen interests. One relates to commonhold and how it works in a mixed-use setting. The Law Commission has suggested in such circumstances ‘sections’, which will enable developers to separate out the management of different types of interest within a commonhold, such as commercial and residential interests. Much of the discussions on the new commonhold design will be taken forward by the Government’s Commonhold Council, which we were asked to nominate a candidate for.

On leasehold enfranchisement, a key interest for us is the threshold at which a mixed-use building cannot be enfranchised. This is currently 25% commercial by floor area. The Law Commission suggested it should remain at 25%, a threshold supported by consultees, but in its final recommendations suggested 50%. Raising the threshold would impact on investors’ development rights and management control and make mixed-use development a less attractive investment.

There is therefore much to engage in on leasehold matters over the next two or three years. Reform is overdue in some areas, particularly around some of the unnecessary procedural hurdles that stop homeowners exercising their enfranchisement rights. However, as has been highlighted there are other areas where reform will need to be carefully considered if it is not to have adverse consequences.

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Ian Fletcher Director of Policy (Real Estate)