Residential lease reform gathers pace

A new Select Committee report recommends more widespread reforms of residential leases.

Residential developers and landlords are once again in the spotlight as the Housing, Communities and Local Government Select Committee has issued a detailed report on the reforms that it thinks are necessary to give residential tenants a fair deal.

The Select Committee report comes on top of the government’s consultation on outlawing leases of houses and capping ground rents in leases of flats and three weighty Law Commission consultations on reforming enfranchisement, reinvigorating commonhold and reforming the right to manage. In some cases, the Select Committee report goes well beyond what has been proposed in the existing consultations.

Key proposals - ownership of flats

The Select Committee wants the government to ensure that commonhold becomes the primary model of ownership of flats in England and Wales. Whether this can be achieved will depend on the outcome of the Law Commission’s consultation. Commonhold may work for simple developments but practitioners believe it is not best suited for developments that include residential and commercial elements. There are also issues that need to be resolved in relation to the financing of developments and the degree of control over the development site that the developer has once it is has been converted into a commonhold property. Short of making commonhold compulsory, the Select Committee’s wishes may remain aspirational.

Contrary to the government’s consultation document, the Select Committee thinks that ground rents in new flat leases should be a peppercorn, not the £10 a year proposed by the government. In a major departure from the consultation, the Select Committee also recommends that legislation should be introduced to cap the ground rents payable under existing leases to a maximum of 0.1% of the value of the property with an upper limit of £250 per annum. This would be a shock to ground rent investors and management companies that both manage residential blocks and receive the ground rents as part of their income for doing so.

The Competition and Markets Authority (CMA) has been asked by the Select Committee to give its view on whether ‘onerous’ ground rent clauses in existing leases are unfair terms and so unenforceable and also to investigate mis-selling of leasehold properties and make recommendations for appropriate compensation.

While the Law Commission is considering the responses received to the consultation on enfranchisement, the Select Committee has called on the Law Commission to come up with a process that makes enfranchisement substantially cheaper. This will undoubtedly involve not only simplifying the process but also reducing the amount that the landlord is entitled to receive from the tenants when they acquire the freehold title to their property.

Key proposals – marketing and sale of leases

The Select Committee wants to reform the process for the sale of flats by developers. It recommends that a standard ‘key features’ document should be given to buyers at the start of the sale process. This would set out very clearly the tenure of a property, the length of any lease, any ground rent or permission fees, and (where appropriate) a price at which the developer is willing to sell the freehold within six months.

The Select Committee also wants to prohibit offering financial incentives to persuade buyers to use a particular solicitor.

Key proposals – ongoing costs

The Select Committee has proposed a series of measures to ensure that residential tenants are not subject to unreasonable permission fees and that service charges should be in standard form, identifying the services for which tenants are paying. The Select Committee recommends that there should be a new consultation process for residential tenants affected by major works in privately-owned buildings. If the proposed works would costs more than £10,000 per tenant, the works should only proceed if a majority of the tenants agree to the works being carried out.

Key proposals – wider reform

A number of people who gave evidence to the Select Committee (including the Law Commissioner responsible for property law) commented that the current residential leasehold legislation is not fit for purpose. The Select Committee has asked that the Law Commission be given responsibility for a root and branch reform of residential leasehold law.

What happens next?

The government, the Law Commission and the CMA have two months to respond to the recommendations of the Select Committee. Whether they have the appetite to embrace the more radical reforms proposed by the Select Committee remains to be seen.

Although the Select Committee does not set the government’s policy, its views are likely to be influential.

A copy of the Select Committee’s full report is available here. https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/1468/1468.pdf.