UK government consults on the collective right to buy and manage mixed use buildings

Views are being sought by the UK government on proposals by the Law Commission to extend the collective right to buy (“collective enfranchisement”) and manage mixed use blocks.  Key changes include extending enfranchisement to buildings that are up to 50% non-residential (from the current 25%), and mandatory leasebacks of non-residential units such as commercial premises. 

The government has launched a consultation seeking views on certain reforms to the leasehold and commonhold system.  The proposals follow recommendations in the 2020 Law Commission reports and consult on further developments following the Law Commission's original consultation.  Of particular interest are the new enfranchisement and right to manage proposals.

Enfranchisement

Since 1967, enfranchisement legislation has provided leaseholders who hold long leases of 21 years or more, a right to buy the freehold of their house or obtain an extended lease.  Enfranchisement rights were extended in 1993 to long leaseholders in a block of flats to allow them to collectively buy the freehold of the building between them,  provided the building was subject to no more than 25% non-residential use. Leaseholders have long argued that the procedure is complex and expensive, leading to unnecessary conflicts, litigation and delays.

Where for any reason leaseholders of flats cannot or do not want to acquire their freehold, the statutory right to manage still allows them to take control of how their building is managed, including by raising service charges and carrying out repair work. 

What are the enfranchisement proposals?

An increase in the  ‘non-residential limit’ from 25% to 50% would mean that a larger number of buildings would be technically susceptible to collective enfranchisement, including buildings which are not predominantly residential.  This is because, across England and Wales, many residential flats are in mixed-use buildings with commercial or retail units on the lower floors.  Although the Law Commission recommended the increase, it did not consult on a new 50% threshold. 

The consultation also seeks views on whether enfranchising leaseholders should be able to compel their outgoing landlords to take a leaseback of non-participatory units including commercial units.  Under the current scheme, leaseholders can only ask the landlord to take a leaseback.  A leaseback reduces the premium which leaseholders have to pay to acquire the freehold, and would allow the leaseholders to avoid having to manage a commercial tenant.  The change is calculated to make enfranchisement more affordable for leaseholders, but on the other hand freeholders would be tied into the property even though they had been compelled to give up their freehold interest.  The exact details of how they would be tied in are not covered in the consultation. 

Comment

Although unwieldly, the industry has learnt to live with enfranchisement, where the right to participate lies with the long leaseholder furthest down the chain.   The increase in non-residential use in mixed use buildings will allow leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or claim a right to manage.  Although this will extend the breadth of the scheme, it remains to be seen whether this will directly translate into more leaseholders of mixed use buildings exercising their rights.  Is acquiring the freehold and management of a building which is up to 50% commercial inherently less attractive than acquiring a building which is predominantly let to the participating residential tenants? 

Landlords looking to future proof their residential and mixed use buildings may find it difficult in practice to prevent enfranchisement rights from arising, assuming their business model has depended on granting long residential leases.  They may be better served by focussing on mitigating against the matters that encourage tenants to embark on a process of enfranchisement, such as ensuring the building and common areas are well managed.  Landlords should prepare a strategy for dealing with enfranchisement when it arises including (a) knowing when they would insist on taking a leaseback of non-residential parts in a building or give up the entirety (subject to the enfranchisement company’s new right to insist on a leaseback), (b) considering the scope for raising service charges for communal areas on an estate with an enfranchised building and (c) considering whether there is a case for setting up an Estate Management Scheme in order to create enforceable obligations on the part of the enfranchisement company, to maintain the enfranchised building to an appropriate standard and contribute to estate costs.

Lenders are likely to be most interested in changes to the valuation process and calculation of the enfranchisement premium.  Enfranchisement involves payment to the outgoing freeholder of a price for the freehold which is calculated using statutory formulae.  Reforms recommended by the Law Commission include the abolition of “marriage value” in the calculation of the price payable on enfranchisement or a lease extension, which may reduce the amount received by the outgoing freeholder. A lender providing finance to that freeholder for acquisition or development of a mixed use or residential development should have in mind the price that the freeholder might receive as part of the enfranchisement process and will be interested to see what effect the changes have on the statutory price.

Right to manage

A right to manage scheme provides leaseholders with the ability to take over all of the management functions relevant to their building by becoming members of a Residential Management Company, subject to certain qualifying criteria.  The landlord retains management duties relating to non-residential units and those that are not held by long leaseholders.  Like  enfranchisement, the right to manage cannot be exercised if the non-residential parts of the building exceed 25%. 

What are the proposals?

As with enfranchisement, the government seeks views on lowering the bar for qualifying buildings, to include those with a non-residential element making up to 50% of the total internal floor space.  This increase was proposed by the Law Commission but not consulted upon.

Comment

It is not possible for leaseholders to pick and choose which management functions they wish to be transferred and which they would prefer to remain with the landlord or other third party management company.  In a mixed use block, the tenants exercising the right to manage do not assume management of non-residential parts or non-qualifying flats.  The rather unsatisfactory result of that is that the landlord not only retains management responsibility for the remainder of the building but also has to pay to the RTM company the share of the service charge attributable to those remaining parts.  Meanwhile, the RTM company has an obligation to review and report on compliance with tenant covenants by all of the tenants of the units.  The division of responsibilities and liabilities can be confusing and lead to disputes.  Where the landlord, still the owner of the freehold, is an investment company which might have appointed its own management company, things can be even more complicated, and the whole situation could be very unattractive to the investor and its shareholders. 

Commonhold

Commonhold is a form of property ownership which allows a flat owner to own their individual unit, with each unit holder in the building being a member of the commonhold association: a limited company, which owns and manages the common parts. The association determines the financial contribution to be paid by each unit holder for the management of those common parts.

Since its introduction in 2002 there has been very little take up in the UK.  With the aim of reinvigorating commonhold as an alternative form of property development and ownership, the Law Commission consulted and then produced a report in 2020 which recommended sweeping changes to the regime.  The government seeks views on adjusting the Law Commission's recommended commonhold voting rights model for shared owners and providers.  The consultation also seeks views on a maximum fee to be charged for the Commonhold Unit Information Certificate (which has to be provided by the association within 14 days of a request).

Comment

The commonhold consultation indicates the government's commitment to the model, particularly for social housing.  Time will tell whether these latest proposals could make commonhold a more common form of property ownership in the UK.

Next steps

If you would like to respond to the consultation, use the link in Related Materials opposite. The closing date for responses is 22 February 2022.  If you have any views on the proposals which you would like to share, please email any one of the contacts. 

 

 

Authored by Tim Reid, Jane Dockeray and Ingrid Stables

 

 

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