Trolley dash

Conveyancing solicitors have had a difficult 18 months, Law Society vice president Lubna Shuja acknowledged as she opened the Law Society’s second virtual National Property Law Conference on 5 October. ‘Throughout the lockdowns,’ she said, ‘the virtual market shutdown in the early days of the pandemic, the huge pressures that came with the SDLT holiday and subsequent extension, the challenges of remote working, and of course the economic strains we have all felt, I feel proud to say that conveyancing solicitors have acquitted themselves incredibly well’.

First introduced in July 2020 for buyers in England and Northern Ireland as part of a Covid stimulus package, the SDLT concession came to an end on 30 September, following a six-month extension in March.

We look set for a raft of changes and political interventions across various aspects of the property market

Lubna Shuja, vice president, Law Society

‘We look set for a raft of changes and political interventions across various aspects of the property market,’ said Shuja, pointing to the fact that parliament is ‘at long last’ considering the Leasehold Reform (Ground Rent) Bill. Introduced in May’s Queen’s speech, the bill has completed its passage through the Lords and had its first reading in the Commons on 15 September.

The legislation implements the government’s commitment to set ground rents (the annual fee leaseholders pay to freeholders) for new residential leases at zero financial value. The Society has been ‘working with parliamentarians of all stripes to seek practical improvements to the bill’. It persuaded the government to table amendments ‘to ensure that legitimate service charges are not caught by the provisions of the bill aimed at reducing ground rents to a peppercorn, and to exclude rack rent leases from the scope of the bill,’ Shuja said. In addition, the Society managed to secure a commitment from the government to an additional amendment ‘to exempt lease variations that constitute a deemed surrender and regrant from the bill’s effects’.  

Also going through parliament is the Building Safety Bill that will establish the new Building Safety Regulator. Chancery Lane is seeking ‘more comprehensive support for leaseholders faced with huge costs for the removal of dangerous cladding from their blocks’, Shuja said.

Melanie Leech CBE, chief executive of the British Property Federation, said the bill ‘was subject to extensive pre-legislative scrutiny’ by the Ministry of Housing, Communities and Local Government (MHCLG) committee before its introduction in the Commons on 5 July (the committee stage started on 9 September). ‘The government has faced a lot of criticism, particularly over who should pay for building remediation,’ she told delegates. The government has amended the bill to include ‘clauses on extending the time period for claims under the Defective Premises Act [1972] from six to 15 years and apply retrospective action to this’ as well as ‘provisions to require property owners to exhaust other means of paying for remediation before charging any cost to the service charge account of leaseholders,’ Leech said.     

In response to the ongoing Grenfell Tower Inquiry, Whitehall is introducing other measures targeted at the largest residential developers. These include a new time-limited residential property developer tax from April 2022 to raise ‘at least £2bn over a decade’ for the removal of unsafe cladding from leased residential buildings. According to a consultation document issued by HM Treasury on 29 April, the charge would ‘only apply to the profits of a company or group which exceed an annual allowance of £25m’. However, ‘what is classed as residential and how profits are calculated is not yet clear’ and ‘the impact of these measures could be felt much more broadly than expected,’ said Leech. ‘Our key concerns are that the tax does not inadvertently catch the built-to-rent sector or purpose-built accommodation for students and older people which we argue should be outside the scope of the new tax.’   

Also ‘likely to have a disproportionate impact’ on the same sectors, according to Leech, is the proposed ‘building safety levy’ on developers of high-rise buildings, for which a consultation closed on 15 October. This levy is expected to come into force in 2023, subject to the passage of the Building Safety Bill which sets the powers to create the levy and establish its terms.   

The renaming of the MHCLG as the Department for Levelling Up, Housing and Communities in the cabinet reshuffle on 15 September, and the appointment of Michael Gove as its new head, is ‘perhaps the biggest political development in the property space’, according to Shuja. ‘Gove has been tasked with getting his teeth into the complex issues of cladding, building safety and planning reform, so we will no doubt see significant movement in the coming months.’

The government’s Planning for the future white paper consultation published in August 2020 set out proposals for ‘once in a generation’ reform of England’s planning system. The government’s target remains to build 300,000 new homes a year across England, and one million over this parliament. This will take it through ‘politically choppy water’, Leech noted.

The government is expected to respond to the consultation and bring forward the Planning Bill in this parliamentary session, as announced in the Queen’s speech. Leech told the conference: ‘We are in something of a holding pattern on planning, with rumours from the political coal face ranging from a wholesale rethink of the plans to a short term tactical regrouping before the government reintroduces many of its existing ideas.’

With no incentives to use commonhold, developers of new buildings were always going to keep to tried and tested leasehold

John Stephenson, BDB Pitmans

‘Normalisation’ of the market?

For the fifth month in a row, annual house price growth in September was still in double digits, according to Nationwide’s latest index; and prices were around 13% higher than before the pandemic began in March 2020. But there were huge regional variations. In Wales average annual house prices were up 15.3% in the third quarter of this year, compared with London, which was the ‘weakest’ performer with annual growth slowing to 4.2% from 7.3% last quarter.  

So what’s next for the market? According to Lucian Cook, head of residential research at Savills, the end of the SDLT stimulus, the relaxation of social distancing measures and the return to the office point towards ‘a normalisation of the housing market’, but offsetting these factors is ‘talk of potential interest rate rises earlier than previously anticipated’ and the fact that ‘we remain in a highly competitive mortgage environment’. Cook told the conference he predicted ‘a soft landing’. Savills’ own forecasts (issued in June) put UK house price growth at 8-9% this year, and 3.5-4% in 2022. ‘Transaction levels next year will fall back dramatically from 1.62 million this year to 1.23 million,’ Savills said.

From 2023 to 2025 there will be a 2-3% rise in house prices, with ‘that rate of growth curtailing as you go further through the period because of the expectation of interest rate rises’, Cook said. 

Offering a practitioner’s perspective on the impact of the 15-month stamp duty relief, BDB Pitmans partner John Stephenson tells the Gazette: ‘The subsidies certainly had the effect of kickstarting the market after its enforced shutdown last spring, and that energy has continued even after the subsidies have been removed.’

Stephenson’s practice had ‘two frantic periods’: one leading to the first proposed end of the tax concession on 31 March and the second to its actual end on 30 June. Since then ‘transactions have continued at a high level, though not at those extreme levels,’ he says, adding that the ‘tapered’ transition at end of the scheme in September has had ‘very little impact’ on transaction volumes.

Commonhold and other reforms 

Practitioners should also expect further legislation ‘in the near future’ on leasehold enfranchisement, commonhold and the right to manage, Shuja told delegates at the property conference.  

In 2018, the government asked the Law Commission to carry out a root-and-branch review of all three areas of law. It published its recommendations for reform in July 2020.

On commonhold, the commission made more than 120 proposals to ensure that this form of tenure becomes ‘the preferred alternative’ to residential leasehold.

Although the government has yet to announce when the recommendations will be implemented, the Commonhold Council was formally launched in May to ‘prepare homeowners and the market for the widespread take-up of commonhold’.  

Chaired by building safety minister Lord Greenhalgh, Council members include the Law Society, represented by Mishcon de Reya’s Philip Freedman, a member of the Society’s Conveyancing and Land Law (CLL) committee. Membership also includes UK Finance, the British Property Federation and the Building Societies Association. 

The Council’s work is focused on implementing commonhold ‘for new housing supply in the first instance but [it will] consider issues around conversion to commonhold at a later stage.’

It will assess all aspects of commonhold, including lending, insurance, valuation, conveyancing, and property management; ensure that commonhold can provide a workable alternative to leasehold in as many settings as possible, including large and complex sites; and ensure that the tenure is ‘future-proofed’ to take account of changing requirements for buildings such as building safety and energy efficiency measures.

Commonhold has many advantages over leasehold. ‘It enables freehold ownership of flats with no ground rent, no third-party landlord and no forfeiture, thus avoiding some of the inadequacies of leasehold tenure,’ says Dona Awano, consultant solicitor at Commonhold and Leasehold Experts Ltd and a member of the CLL.

Yet, fewer than 20 commonholds have been created since the legislation introducing it in England and Wales (the Commonhold and Leasehold Reform Act 2002) came into force in 2004.

By comparison there are around 4.6 million leasehold homes in England, according to MHCLG estimates, and most flats in the private sector are leasehold.

So why has commonhold not taken off? Anna Favre, partner in residential estate at Cripps Pemberton Greenish, says it is primarily due to ‘unfamiliarity with a novel form of ownership’. Property developers have been ‘unwilling to take a risk on untested structures and procedures’, she says, adding: ‘Equally, mortgage lenders have demonstrated reluctance to lend on commonhold properties for similar reasons and over concerns of prejudice to their security in the event of the commonhold association going into liquidation.’

Natasha Rees, partner at Forsters in London, says: ‘There is also no incentive for developers to build new commonhold developments, whereas leasehold offers them significant financial advantages with opportunities for future revenue through ground rent, the sale of lease extensions or the selling of the freehold.’

‘With no incentives to use commonhold, developers of new buildings were always going to keep to tried and tested leasehold,’ says Stephenson. He argues that ‘genuine incentives for developers’ are needed. ‘The use of leasehold must be fiscally discouraged if commonhold is to take hold.’

Favre says that possible incentives could include tax breaks and relief on SDLT, but stresses that ‘ensuring there is sufficient flexibility in the way commonholds can be built and managed, and enabling its use for developments of all types and sizes will help to ensure a wider uptake and increase market confidence’.

‘The legislation isn’t flexible enough to enable mixed-use developments, which contain both residential and commercial units to be set up as commonhold,’ notes Awano. ‘It is also not possible to grant affordable shared ownership leases within commonhold.’  

Furthermore, to convert a leasehold block into commonhold, everyone with an interest in the property – the freeholder, all leaseholders and every mortgage lender – must agree to the conversion, making it ‘very hard to achieve’, says Rees. 

There are also financial risks. For instance, where ‘unit’ owners fail to pay their contribution towards the maintenance of common parts to the commonhold association (the company that owns and manages them), there is not ‘a straightforward option for the association to recover the money owed’, according to Awano. ‘The result may mean that other unit owners will have to cover the shortfall or, in a worst case scenario, it might result in the commonhold association becoming insolvent,’ she says.

‘Finally, there are concerns over the impact of the association’s insolvency on lenders and uncertainty over how mortgages on leasehold flats will be transferred to a commonhold unit upon conversion.’ 

The remit of the commission’s project was to ‘reinvigorate commonhold as a workable alternative to leasehold, for both existing and new homes’.

One key recommendation is that conversion should no longer require the agreement of every interested party in the building. That includes allowing it without freeholder consent by a streamlined ‘acquire and convert’ process, Rees points out. ‘The first step will be for leaseholders to acquire the building by collective enfranchisement and then convert it to commonhold. It will only be necessary for 50% of leaseholders in the block to support the process. This should make it easier for blocks to convert to commonhold, although it is currently unclear whether government funding will be available for non-participating leaseholders.

‘The proposal that the government should work with lenders to ensure that they accept the transfer of the mortgage to the commonhold title should make a difference.’  

There are also recommendations to make the dispute resolution process simpler and more effective, reinforcing the role of ADR within the commonhold dispute resolution procedure, and giving the commonhold association new powers of enforcement for the recovery of debt, Awano observes. This includes the power to apply to court for the sale of a defaulting unit owner’s property.

Some practitioners point to other necessary measures to kickstart the market. The commonhold community statement (the equivalent of the lease contract) sets out the local rules, and the rights and obligations of the unit owners and the commonhold association. But Awano argues the CCS is ‘too prescriptive and there is a need for the revised commonhold regime to provide a legal framework within which there is the flexibility to draft the governing provisions in the CCS to suit many different situations’.

‘If commonhold is going to have a chance of working, it needs active government support,’ Rees concludes: ‘Hopefully the launch of the Commonhold Council is a first step in this process, as significant changes to the current law are required.’

Marialuisa Taddia is a freelance journalist