Law Commission hears views on commonhold

Law Commissioner Nicholas Hopkins speaking at the All Party Parliamentary Group meeting in April

On Monday the Law Commission held its first stakeholder meeting on commonhold – which it is tasked to review, along with lease extension and enfranchisement as part of the government’s initiative to reform the leasehold sector.

Held in the Ministry of Justice, it was a miniature conference of around 70 invitees including the three MP patrons of LKP – Sir Peter Bottomley, Sir Ed Davey and Jim Fitzpatrick – civil servants, assorted landlord and tenant lawyers, developers, property managers, relevant trade bodies, housing associations and academics.

These included professors James Driscoll and David Clarke who were closely involved in preparations for the Commonhold and Leasehold Reform Act 2002.

The event was held under Chatham House rules, so comments cannot be attributed to named participants. It lasted two and half hours and was a well organised, serious engagement with the issue of commonhold, rather than the more familiar cosy chats among leasehold sector professionals.

Nonetheless, when one of the LKP patrons asked how many of the present attendees were “on the side of the consumers” only a fraction of them could plausibly be described as such.

“Fewer than half,” said the MP, but less than 10 per cent would have more accurate.

There are plenty of professionally qualified leaseholders who run self-managed blocks in Londons where the combined assets are worth hundreds of millions of pounds who could, in fact, be invited to an event such as this.

The Law Commission inquiry, headed by Professor Nick Hopkins, has been working fast since it was tasked in December and will outline in draft its findings in October.

Commonhold introduces freehold ownership to flats and is the prevailing system in most jurisdictions with England and Wales alone perpetuating leasehold. The inquiry is studying other jurisdictions – Australia, New Zealand – and has dusted down the Wilberforce committee of the 1960s, where it was first considered.

The event began with asking why commonhold had had such a low take-up.

This is politely attributed to the lack of incentives to developers (they make so much more money from leasehold); unfamiliarity among lenders; possibly the existing tribunal system deterring take-up and – the sector’s favourite – lack of consumer awareness.

Fortunately – thanks to LKP and the National Leasehold Campaign – consumers are getting quite aware nowadays: hence plc housebuilders in full retreat from leasehold houses.

One of the MPs was in no doubt that developers were primarily to blame for the depriving ordinary consumers of proper home ownership through leasehold trickery, even though they were familiar with property tenures in other jurisdictions (such as Scotland).

The MP contrasted the leasehold world’s wonderful inconsistency: that leaseholders are, of course, real home owners when it comes to the marketing of these products and tenants when it comes to legal disputes or paying for developers’ or regulators’ errors such as the Grenfell cladding removal.

The Law Commission meeting pondered specific issues concerned with commonhold.

For example, how to convert a block of flats to commonhold which would need the agreement of all leaseholders and freeholder. This contrasts with collective enfranchisement under the leasehold system, which would require majority leaseholder agreement.

There was some chewing of cud concerning existing leaseholders who may not want to convert to commonhold.

Of course, enfranchisement cannot be compared with commonhold: it has been described as “commonhold lite”.

And games can be played, whereby a block controlled by a majority acting together re-enfranchise to the detriment of the minority: this can happen in sites where there is significant financial gain to be had from redevelopment.

The Law Commission considered issues concerning liability and what happens when a commonhold association becomes insolvent.

In some jurisdictions, the liability is limitless: so if a block is uninsured and a passerby gets killed through negligence, the commonhold owners can lose their homes.

Rightly, argued one lawyer, as they have the same responsibility as any other freehold homeowner.

On the other hand, there are plenty of houses in the UK owned by limited companies which in this situation might limit liability (although the negligent directors may be found personally liable for failing to insure).

Finally, there was discussion about mixed-use developments, where tiered commonhold structures exist along with leases for shops and offices.

Several in the audience urged commonhold to begin working and to remove the exploitative and superfluous figure of the freehold owning landlord.

Property managers argued for clarity: if we are going to have commonhold, make it clear and don’t muddle it with leasehold structures.

Among the developers, there seems to be a realisation that the game is up with creating new ground rents, flogging off freeholds and disempowering the consumers (their customers, after all).

This is a battle that seems to be being left to the retirement housing providers, who meet later this month to talk up ground rents at a stakeholders’ meeting to which LKP and www.BetterRetirementHousing.com are not invited.

The leaseholders doomsters will say the Law Commission meeting was all tokenistic and not much is going to happen, that vested interests will prevail and that English and Welsh leaseholders will exist in feudal subjugation until the end of time.

And there are, of course, other Law Commission reports – reforming forfeiture – which have gone nowhere.

That is not our impression.

There are plenty of sector insiders lobbying away to derail the civil service and Law Commission and ministers from taking action on our dismal leasehold system. (And to get the ever-obliging property tribunal to fix high capitalisation rates, to secure existing ground rent values.)

There were plenty of forces of darkness at the Law Commission meeting – point scoring over landlord and tenant arcanery and grandstanding in order to ingratiate oneself with the richer London freeholders. But over all it was a positive and sincere effort to grapple with commonhold.

“Bet you never thought we would take this this far,” I said to one London house builder (that hasn’t played excessive games with leasehold).

“Bet you didn’t either,” came the reply.

“Worried about commonhold?”

“No, if ground rents go it is all over anyway. We will get over it.”

Quite.

Related posts:

Enfranchisement, commonhold and managing agent regulation are first up for the Law Commission For first time in 14 years, Westminster hears more of commonhold Views of Tory MP Crispin Blunt: Government should ‘nullify’ ground rents. End ‘feudal’ leasehold. Bring in commonhold. And stop developers’ and solicitors’ ‘unconscionable’ cheating of the naïve Law Commission sets out how it hopes to create a better deal for leaseholders – and look at alternatives Law Commission: ‘We want to hear about problems in leasehold law’