The Law Commission report into leasehold reform is a timely announcement, as the Government looks to restart the housing market. But we sound a note of caution.
The proposals, announced on 21 July, to streamline and simplify the process of buying the freehold of a leasehold property are especially welcome – not least because every lease is getting shorter. However, it is debatable whether the changes set out in the report will equitably offset the proposed extension to permitted development rights that was announced earlier this month. This would allow certain building owners to add another two storeys to residential blocks without planning permission, increasing what is known as the ‘hope value’ of a building, and therefore making the purchase of the freehold of a building more expensive. So despite the clear benefit of the proposed reforms, the Government could simply be giving with one hand and taking with the other.
Improving leaseholders’ right to manage their building is also welcome, especially in smaller blocks where, if there is harmony among leaseholders, self-managing may be an option. This means insurance commissions can be saved, and budgets and major works plans can be set by those who want to maintain their asset value, rather than by an absentee freeholder who, disillusioned by the diminishing value of his reversionary interest, may have given up!
The Law Commission’s report into leasehold reform also carries the oft-repeated call for converting leasehold flats into commonhold. Unfortunately this is not as simple a solution to the woes of leaseholders as people think. In fact, it would create a lot of grey areas around building management – and would impact the ability of managing agents to stand as directors for Resident Management Companies because not one leaseholder can be found to step forward as a director.
Commonhold is not a silver bullet; like all forms of tenure it comes with its own problems. Many institutional investors such as pension funds and insurers have invested in freeholds and ground rents provide them with an important income stream to match their liabilities. So with many major investors losing out on revenue during the Covid-19 outbreak as shopping centres and offices have remained closed, any move towards commonhold must be made while bearing this fact in mind.
For more on leasehold reform read our previous blog here.