Impressive plans, but devil will be in the detail on new enfranchisement rights

The intention behind the government’s latest announcements around leasehold reform is clear: to make it easier and cheaper for leaseholders to buy or extend the lease on their homes. But a lot of detail remains outstanding. Until we know more, there are a number of potentially unintended consequences which could frustrate these otherwise noble intentions. The government is pushing forward with reform in two stages: the first focused on lease extension and enfranchisement and the second on the expansion of commonhold. For now, the particulars of enfranchisement and lease extension may prove difficult to unpick. A close eye should be kept on a number of potentially negative outcomes to ensure the new system is one that works for new buyers, existing leaseholders, and responsible freeholders in the long-term. If not, the result could see us back to square one in just a few years’ time, forced into further reforms because of mistakes made along the way. Moving the dial The latest announcements centre around measures which will allow leaseholders to pay less to extend their lease or acquire the freehold, for leases to be extended by up to 990 years rather than the current 90, and for ground rents to be reduced to zero on extension for house leaseholders. While leaseholders of second-hand properties will not benefit from zero ground rent, in new leases they may see changes to the cost of buying out their obligation. This is a significant change from the current arrangement, and one which will impact the market both as the reforms are brought into action, and in the future when the transition has been made. Short-term risk The transition period will inevitably be bumpy. This is a fundamental shake up of the way property is owned in this country. But some of those bumps can be predicted and accounted for. One risk is a stagnation in the property market. For instance, we could see leaseholders who stand to save significant sums under the new rules withdrawing from the market temporarily. They could then action the 990-year extension, taking advantage of the saving before returning to the market with their improved asset. The obvious benefits could have a major effect on the supply of housing in areas with a high concentration of short leases, with stock leaving the market simultaneously when the new rules come into force. Supply could also be reduced as leaseholders will be able to block the creation of further floors of flats on their building without cost by acquiring the freehold with a restriction against development, in lieu of having to pay out for the development value. The new measures will also be of little comfort for those who cannot wait for the reforms to come into effect because they need to extend their lease or sell their home immediately. They may be forced to extend before the process is made cheaper, to make their property marketable with many buyers likely to be seeking long-term leases which comply with lenders’ lease length requirements. Similarly, sellers may suffer from a two-tier market where buyers prefer to buy flats with zero ground rents attached, forcing them to buy out their obligations before bringing their property to market. It is also potentially limiting for those who need to act nimbly. The rules around zero ground rents mean that many freehold landlords may prefer to avoid voluntary lease extensions – often used under the current rules – to instead go through the statutory process, which may incur more time and cost for the leaseholder. While regulation is good, restriction is not. Long-term questions It is also worth considering some of the more fundamental questions around this kind of reform. There may be some leaseholders who, in hindsight, come to see the changes as detrimental to the marketability of their property. Particularly for those who did not participate in the enfranchisement, making it easier and cheaper to acquire the freehold brings on more difficult and expensive headaches. For instance, self-management by leaseholders often gives responsibilities to those with no experience. Often management is then undertaken with an eye on short-term annual costs, ignoring statutory obligations and the long-term picture. The scope for disputes between neighbours will also increase, and will be costly to resolve – further affecting saleability. Under the old model, payment of ground rent incentivised ownership by an experienced, regulated freeholder, who handled the more onerous tasks involved with managing a building. There needs to be an equally responsible programme of education to make sure enfranchising leaseholders are informed of all the freehold issues which will be paid for and managed by residents in future. Some leaseholders might opt to continue paying ground rents as an alternative to self-management. That could allow them to retain some of the benefit and stewardship provided by freeholders – but also risks creating elements of a two-tier market which, again, will need to be explained to and understood by homeowners. Whatever the outcome, the new system will rely on leaseholders having their options clearly communicated to them when deciding whether to extend their lease. This will come into even sharper relief when the second stage of government reforms around commonhold are brought forward. The proof of the pudding The government’s progress on leasehold reform in the past three years is impressive. Much of the detail has been investigated through the Law Commission, but there is still work to be done. Without ardent attention to detail, unintended consequences are likely to arise. As ever, the challenge will be to take into account the many different circumstances which affect leaseholders all over the country, and to find a system which works for all. We look forward to seeing more detail about how the government plans to bring these lofty and ambitious reforms down to earth. Mark Vinall is a partner at Winckworth Sherwood Photo by Andy Rain/EPA/EFE/Rex Shutterstock