This Department for Levelling Up, Housing and Communities consultation – Reforming the leasehold and commonhold systems in England and Wales – sought views on a number of reforms following recommendations in the Law Commission’s reports published in July 2020. The consultation ran from 11 January 2022 to 11:45pm on 22 February 2022.
Broadly speaking Shared Ownership Resources supports reforms which provide greater rights and more control to leaseholders. However, this particular consultation relied on a number of assumptions about shared ownership which do not appear reliable. For example, the assertion that shared ownership is ‘affordable’, or that the landlord is the freeholder. (In a shared ownership context, complex ownership structures can create significant problems for shared owners.)
In addition, it is counterproductive to incorporate the shared ownership model into wider initiatives whilst so many problems with that model remain unresolved.
Shared Ownership Resources responses are provided in full below.
Question 1. Do you agree or disagree that increasing the non-residential limit for collective enfranchisement from 25% to 50% meets government’s aim of addressing the historic imbalance of rights between freeholders and leaseholders?
a. Agree
b. Disagree
c. I don’t know
Question 2. Do you support or oppose a 50% non-residential limit for collective enfranchisement?
Mixed-use buildings refers to properties that contain both residential units such as flats, and commercial units such as shops, offices, or restaurants.
This proposal will allow leaseholders of flats in mixed-use buildings to collectively purchase the freehold of the whole building where the flats make up half or more of the property.
a. Strongly support
b. Support
c. Neither support nor oppose
d. Oppose
e. Strongly oppose
If response Strongly support or Support – What are the benefits of increasing the non-residential limit for collective enfranchisement from 25% to 50%? (Max 500 words)
It is increasingly apparent that developers, housing providers and managing agents have not prioritised the best interests of leaseholders for some time. Failings have been enabled, in part, by the fact so many leaseholders in mixed-use buildings are excluded from the right to collectively enfranchise to obtain their freehold, take control of their own building management (perhaps by appointing a managing agent who is directly accountable to them), and escape costs and difficulties associated with a short lease (where applicable). A mixed-use site with over 50% leaseholders is self-evidently ‘predominantly residential’ (understood as more residential than not). As such leaseholders should have the right to collectively enfranchise to gain additional control over their properties. For this reason, increasing the non-residential limit for collective enfranchisement from 25% to 50% is strongly supported.
However, whilst the consultation presumes a fixed threshold for the right to collective enfranchisement, it is hard to see why leaseholders in a mixed-use development with 51% residential units should have that right, whereas leaseholders in a development with 49% would not. There is also a risk that developers will design in usage allocations that purposefully eliminate the right to collectively enfranchise. This could be done via the mechanism of ensuring the proportion of non-residential units in any particular development or section remains slightly above the threshold.
As assured or assured shorthold tenants, shared owners do not have the right to participate in collective enfranchisement. There is a risk that a large proportion of shared ownership homes in any particular section could therefore reduce affordability in practice for those ‘true’ leaseholders who have a legal right to collective enfranchisement. The total cost of enfranchisement would be shared between a smaller number of leaseholders than would be the case if there were no shared ownership units, perhaps thereby pushing it out of reach.
This is addressed in the Law Commission’s proposal that participating leaseholders could enter into arrangements to ‘with external investors’ for them to buy some or all of the shared ownership units (along with flats which have been left empty, let on tenancies of 21 years or less, or let to commercial tenants). What would be the implications for shared owners themselves of selling on interests in shared ownership leases to purely commercial investments? Particularly given that the Law Commission’s 2020 report ‘Reinvigorating commonhold’ indicates that shared owners could be liable to housing providers for costs over and beyond those agreed in the Commonhold Association budget.
From a wider perspective, commoditisation of residential property has proceeded at such a pace that, whoever holds the freehold, there remains the possibility of adversarial relationships between different parties associated with the building. This raises concerns about the benefits – for home buyers – of mixed-use developments which include both ‘true’ leases and shared ownership leases. It is not at all clear how it is of benefit to either ‘true’ leaseholders or shared owners (assured or assured shorthold tenants) for the two very different tenures to be provided within the same commonhold scheme.
Question 3. If you were to benefit from a new 50% non-residential limit, would you buy your freehold?
a. Yes
b. No
c. Not sure
d. Not a leaseholder
Question 4. If no/not sure to Q 3, please select all relevant reasons?
a. Cost i.e. can’t afford cost of buying freehold
b. Do not want ownership and management responsibility
c. Not enough qualifying tenants
d. Not enough support from other qualifying tenants
e. Other
Other (Please Specify) The founder of Shared Ownership Resources bought a shared ownership flat in a 100% residential building. The property was converted to shared ownership flats with 99-year leases in 1999. Many residents have now spent so much on unanticipated costs of staircasing and/or lease extension it’s unlikely some could additionally afford the costs of enfranchisement (albeit leasehold extension would reduce the cost of enfranchisement). Also the benefits would be more limited given the number of residents who now have longer leases than previously, meaning there could be limited appetite for collective enfranchisement.
Question 5. Are there any individuals, organisations or types of properties that you believe should be exempt from the proposed increase in the non-residential limit to 50%?
a. Yes
b. No
c. I don’t know
Question 6. Do you support or oppose a 50% non-residential limit for individual freehold acquisitions?
More information: Please refer to Chapter 2: The non-residential limit for collective enfranchisement, Section: Interdependent proposals – Individual freehold acquisitions, paragraphs 25 – 29.
a. Strongly support
b. Support
c. Neither support nor oppose
d. Oppose
e. Strongly oppose
If response Strongly support or Support – What are the benefits of a 50% non-residential limit for individual freehold acquisitions? (Max 500 words)
A 50% non-residential limit for individual freehold acquisitions would align with the Law Commission’s recommendations for collective freehold acquisitions. This should make the principle itself easier for homebuyers to understand. Unfortunately, treating home ownership matters as simple or straightforward when they are patently not can be counterproductive. It is possible that a 50% non-residential limit for individual freehold acquisitions would create a loophole which unscrupulous developers might take advantage of to eliminate the right to individual freehold acquisition.
Question 7. What are the potential impacts of introducing a 50% non-residential limit for individual freehold acquisitions? (Max 500 words)
There is a risk that freeholders/developers will intentionally sidestep the 50% non-residential limit by, for example, extending the commercial space specifically for this reason. This potential loophole will need to be adequately addressed in future legislation.
Question 8. Do you agree or disagree that mandatory leasebacks to landlords as part of the collective enfranchisement process will reduce the cost of purchasing a freehold?
More information: Please refer to Chapter 2: The non-residential limit for collective enfranchisement Section: Interdependent proposals – Mandatory leasebacks, paragraphs 30 – 33.
a. Agree
b. Disagree
c. I don’t know
Question 9. Do you support or oppose mandatory leasebacks to landlords as part of the collective enfranchisement process?
a. Strongly support
b. Support
c. Neither support nor oppose
d. Oppose
e. Strongly oppose
If response Strongly support or Support – What are the benefits of mandatory leasebacks as part of the collective enfranchisement process, on the presumption of a 50% non-residential limit? (Max 500 words)
Mandatory leasebacks would benefit leaseholders by reducing the costs of collective enfranchisement. On the other hand, mixed-use developments clearly introduce complexities – as the argument for mandatory leasebacks illustrates – which would simply not arise in purely residential buildings. It is essential that regulation of residential property marketing is improved such that home buyers are made aware of all the information they require in order to make informed decisions in what is already a complex market, and one which is becoming more rather than less so for many home buyers.
Question 10. Do you agree or disagree that increasing the non-residential limit for the right to manage from 25% to 50% meets government’s aims of addressing the historic imbalance of rights between freeholders and leaseholders?
a. Agree
b. Disagree
c. I don’t know
Question 11. Do you support or oppose a 50% non-residential limit for right to manage claims?
a. Strongly support
b. Support
c. Neither support nor oppose d. Oppose
e. Strongly oppose
If response Strongly support or Support – What are the benefits of increasing the non-residential limit for right to manage from 25% to 50%? (Max 500 words)
As above, it is increasingly apparent that developers, housing providers and managing agents have not prioritised the interests of leaseholders for some time. Such failings have been exacerbated by the fact that freeholders and their agents have little incentive to provide quality or value for money given that leaseholders are essentially ‘captive consumers’. The degree to which the commercial profit motive has been pursued at the expense of homebuyers’ and leaseholders’ financial and mental well-being is not in the public interest; particularly given that buying a home is one of the most expensive purchases most members of the public will ever make. For this reason increasing the non-residential limit for right to manage from 25% to 50% is strongly recommended.
Some additional considerations will need to be taken into account in taking these proposals forward.
At least one local authority has voted to become a provider of shared ownership schemes. Local authority shared ownership schemes are excluded from the right to manage. Given that 100% staircasing creates a ‘true’ leasehold, consideration should be given to the rights of both shared owners and leaseholders in local authority properties. Divergences arising between local authority housing, the not-for-profit housing sector and commercial developments would create even greater complexity in what is already an extremely complex marketplace, making informed decision-making by home buyers even more challenging than it is already.
Whilst many leaseholders will undoubtedly want to take control of the management of their homes (particularly if they have had bad experiences with freeholders and their agents) it is less clear that they would necessarily be keen to take on management of a mixed-use scheme with overall responsibilities for both residential and commercial properties. The choice on offer between either having limited control over their own homes or otherwise taking on responsibilities for management of both residential and commercial properties may feel to some like Hobson’s choice. Are mixed-use buildings (in the context of the current legal framework) really in the best interests of a majority of leaseholders?
Question 12. Do you agree or disagree that right to manage company voting rights should be amended to ensure leaseholders continue to have effective control of decisions?
a. Agree
b. Disagree
c. I don’t know
Question 13. Do you support or oppose capping the total votes allocated to landlords in right to manage companies to one-third of the total votes of qualifying tenants (Law Commission’s Option 3)?
a. Strongly support
b. Support
c. Neither support nor oppose
d. Oppose
e. Strongly oppose
If response Strongly support or Support – What are the benefits of capping the total votes allocated to landlords in right to manage companies to one-third of the total votes of qualifying tenants? (Max 500 words)
Capping the total votes available to landlords should help to ensure the aims of the right to manage recommendations are not undermined in practice. Consideration should also be given to other potential complexities that could dilute the effectiveness of the reforms. For example, where leasehold flats are owned by offshore investment vehicles, or by other entities with commercial intentions for the properties which may differ from those of leaseholders living in units in the same development or section.
Question 14. Do you support or oppose that, where Shared Ownership providers are liable for paying for repair and maintenance during the ‘Initial Repair Period’ of a new Shared Ownership lease, they should have the right to vote on matters relating to these works and their costs?
a. Support strongly
b. Support
c. Neither support nor oppose
d. Oppose
e. Oppose strongly
If response Strongly support or Support – What are the benefits of allowing Shared Ownership providers the right to vote on matters relating to the works and costs for which they are responsible during the “Initial Repair Period”? (Max 500 words)
In many respects this question flags up both inherent flaws in the shared ownership model, and the problematic nature of the ‘initial repair period’. Shared ownership is not shared. The initial repair period does not address this fundamental underlying issue. Nor is it the ‘repair-free period’ it is sometimes described as. Rather, housing providers will make a capped contribution to qualifying essential costs for a time-limited period. It may be hard to predict whether shared owners or their housing providers will be paying the greater amount towards actual costs in any given year, in any given development or section. Consequently, it is complicated to assess who should have the greater right to voting on matters relating to works and costs they are responsible for.
Unfortunately many housing associations have lost the trust of many shared owners by failing to provide quality, value for money or – indeed – any degree of transparency as regards service charge expenditure. In this context, I would not support housing providers having voting rights, and consider that it is fairer for those both receiving and legally liable for costs generally of services provided to have the right to vote on those services.
It’s also worth noting an apparent assumption in Law Commission and Government materials that the housing provider will usually be the freeholder. But ownership arrangements are often complex; the housing association may simply be a head leaseholder, or even a sub-lessee. Will complex ownership structures have any impact as regards implementation of these proposals? It would be helpful to know whether or not complex ownership arrangements of shared ownership units were considered, and what conclusions were drawn.
The reason for opposing this proposal, rather than opposing it strongly, is that it is hard to see why shared owners – as assured or assured shorthold tenants – should be required to take on responsibilities for an asset they do not ‘own’ in law to the same degree as neighbouring ‘true’ leaseholders.
There is additionally a potential problem that shared owners may be required to make payments directly to the housing provider over and above payments determined by the Commonhold Association. To the degree that shared owners may be subject to additional costs directly charged by their housing provider, voting rights on Commonhold Association budgets have correspondingly diminished value.
Question 15. Do you support or oppose that, where Shared Ownership providers wish to delegate this right over decision-making to the shared owner, they should be able to do so?
a. Support strongly
b. Support
c. Neither support nor oppose
d. Oppose
e. Oppose strongly
If response Strongly support or Support – What are the benefits of allowing Shared Ownership providers to delegate this right over decision-making to the shared owner? (Max 500 words)
I would support this proposal if, and only if, the rationale for delegating this right over decision-making was clearly and transparently explained in writing, and the shared owner understood any potential accountability and other implications arising. My concern would be that a greater degree of accountability is delegated than is reasonable for the assured or assured shorthold tenancy legal status of shared owners.
Mixing ‘true’ leasehold units and shared ownership units (assured or assured shorthold tenancies) in a mixed-use development is likely to create a number of anomalies which do not appear to be adequately addressed in this consultation. For example, the 2020 Law Commission report specifies that a shared ownership flat which has been staircased to 100% must be sold on as a commonhold unit. But it is not specified whether a shared owner can sell a part-share. Would they be required to undertake a costly and complex simultaneous sale and staircasing transaction in order to enable sale as a commonhold unit? Clarification on these matters would be welcome.
Question 16. What should be the maximum fee (£) for issuing a Commonhold Unit Information Certificate (CUIC)?
a. 151 – 200
b. 101 – 150
c. 51 – 100
d. 0 – 50
e. Other (Please specify) (£)
Why do you think your chosen maximum fee (£) is most suitable? (Max 500 words)
It does not seem particularly valuable to blindly select a figure in the absence of information on the actual cost of producing a CUIC.
Question 17. Do you support or oppose a sanction on the commonhold association that no fee is payable, if the deadline for the CUIC’s provision is missed?
a. Strongly support
b. Support
c. Neither support nor oppose
d. Oppose
e. Strongly oppose
If response Strongly oppose or Oppose – What are the challenges or dis-benefits of placing a sanction on the commonhold association that no fee is payable, if the deadline for a CUIC is missed? (Max 500 words)
A no-fee sanction could act as an incentive to meet deadlines. But it wouldn’t provide actual resolution to a situation where, for whatever reason, the CUIC continued not to be provided.
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