11th Jan 2021|News|Sales|Lettings|Estate Management|

Leasehold reform – what does the future hold?

The MHCLG secretary Robert Jenrick MP has recently announced that millions of leaseholders will be given the right to extend their lease by a maximum term of 990 years at zero ground rent.

These measures will be part of the largest reforms to property law for 40 years, the government sees this as a way to make homeownership fairer and more secure.

Housing Secretary Rt Hon Robert Jenrick MP said:

“Across the country people are struggling to realise the dream of owning their own home but find the reality of being a leaseholder far too bureaucratic, burdensome and expensive. We want to reinforce the security that homeownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners. These reforms provide fairness for 4.5 million leaseholders and chart a course to a new system altogether.”

In tandem with this activity, the government is also preparing for a widespread take up of commonhold by establishing the commonhold council – a partnership of leasehold groups, industry and government. Legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero. This is the first part of seminal two-part reforming legislation in this Parliament. There will then be a response to the remaining Law Commission recommendations, including commonhold, in due course. The full release can be found here.

Centrick Building & Estate Management

So how will this affect the leasehold industry moving forward?

There is much discussion as to whether this move is fundamentally the right one. In many cases, the option for a commonhold model would most certainly be sensible. Where there is a development with engaged residents and perhaps consisting of a simplistic set of assets in the building to maintain. However, where the development is large scale with complex M&E and long term maintenance requirements, coupled with a highly tenanted environment where the owners are absent and lacking in a desire to take on the (significant) responsibilities – will this work?

Let’s not forget the building safety bill is currently in motion and with that brings even further obligations for those responsible for the building. Will residents want to step forward into this space? One hopes that this does not restrict the aims of the government moving forward by reducing options when setting up developments. Perhaps a more regulated ground rent system would provide the right level of flexibility to ensure that all buildings are catered for, and we don’t see developments fall into disrepair, lose value and ultimately incur a greater cost for the residents?

With regard to new developments, and in the interim period before commonhold potentially becomes more widely adopted, I would expect that we will see an increase in 3 party leases and the utilisation of RMCs. Developers rarely want to retain the obligations set out in the lease so will regularly sell on the freehold – but if there is no professional landlord to purchase said freehold (as the appetite has gone away through the lack of ground rent income) then an RMC will allow the developer to pass on the lion share of the responsibilities that lie within the leases.

Commonhold has been around as an option for many years now (Commonhold and Leasehold Reform Act 2002), however it has not been adopted in England on any sort of scale. It is common in other countries (Scotland, Spain, US, Australia, etc) and the government has for a long time been keen for the model to take off here. The ground rent and commonhold items go hand in hand, as a development needs to be set up as Commonhold at the point of registration at land registry, but why would a developer do this when they can sell the ground rent on, in a leasehold model? However, if ground rents are zero then that option effectively goes away and commonhold will then become more viable.

Commonhold effectively provides all of the residents in a building the decision making powers, but there are protocols that have to be followed. There is a Commonhold Association which is set up in a similar fashion to an RTM, but all residents are members. More information on commonhold can be found here.

So what does that mean for managing agents?

Well, firstly it won’t happen overnight, but that doesn’t mean we shouldn’t prepare and monitor progress closely. Converting current leasehold developments to commonhold is not easy and being able to bring all residents together in a building to agree is rare, this won’t happen on any sort of scale.

What is evident though, in any route that is taken, the government are clear in their message that things should be easier, more transparent and within the control of the residents that live in a building. At Centrick we are already focused on providing a service that is customer-centric, and this will become even more important.

Imagine a world where every new development is run by an association with the input from all the residents in that building? There will need to be higher levels of visibility, education, availability of information, slick technology solutions and superior levels of communication.

If managing agents don’t prepare adequately it could be crippling. Dealing with a board of RMC directors in a building is often challenging but to have to satisfy the questions and expectations of all members of a commonhold association could be very resource hungry. But we know this is coming and we are setting ourselves up in such a way to ensure that we have a model that works. In reality there are lots of things that would be viable, both in a leasehold and a commonhold environment that can be focused on today…invest further in our technology, improve methods of communication and availability of information, etc

As explained, this will not change overnight, however there will be change. What impresses me at Centrick is that we strive to get to market first with new ways of serving our customers. We are already spearheading pieces of work during 2021 that will complement this changing landscape and position us well for what lies ahead.

I have always had the ambition that we will be the ‘customers choice’ for residential services provider, with this news becoming a reality over time – the success of the business will rely on it!

Phil Johns – Managing Director, Centrick