Implementing reforms to the leasehold system in England was the Government’s consultation on the implementation of reforms to the leasehold system announced by the Government on 21 December 2017.
A major purpose of the consultation, which closed on 26 November 2018, was redressing the balance in favour of homeowners. Headline proposals included a planned prohibition on grants of long leaseholds on newly-built homes unless certain exceptions apply, designed to encourage freehold home ownership, and limiting ground rents to a nominal value.
The consultation also contains suggested reforms for the charges that freeholders pay towards communal areas (estate / service charges), which this article examines further.
Proposed changes
Freehold owners contribute to the upkeep of shared amenities and spaces in different ways, such as deed of covenant or estate rent charge. The consultation treats these contributions as equivalent to what would generally be considered service charges if they were leasehold properties.
Freeholders currently have no mechanism to question the reasonableness of those charges. This can be contrasted with the position for holders of long leases (e.g. for 99 or even 999 years), despite the practicalities of the two types of ownership being very similar.
The Government plans to give freeholders protections along the lines of those enjoyed by leaseholders under the Landlord and Tenant Act 1985. Those protections include requirements that maintenance should be performed to a reasonable standard, and the charges should be exacted with fairness and transparency.
There is little indication of what ‘transparency’ will mean, how it is to be measured, or if there will be any sanctions for those that don’t satisfy the requirements. Presumably, the proposals will be implemented in a similar way to the existing protections for leaseholders.
Reasonable charges
Under the proposal, aggrieved freeholders will be able to challenge the reasonableness of charges at the First-Tier Tribunal. The logic behind these changes makes sense, as going forward residential ownership will be on a freehold basis in line with the other proposals, so the current system will need overhauling.
If the statutory protections contained in the Landlord and Tenant Act 1985 continued to apply to only leases, large numbers of new freehold homeowners would be funnelled into a situation where they had fewer protections than long leaseholders. Politically, this would be unacceptable.
These changes are not expected to add much to the burden of management companies as they will already be used to dealing with leaseholds that have the protections of the 1985 Act, and may even bring a little clarity as the majority of homeowners will be on a level playing field.
Right to manage
The consultation also asks for views on whether freeholders should be able to apply to change the management of services, similar to the right of leaseholders to appoint a manager to carry out a management order made by property tribunal. Of course, if such a measure were to pass, it could potentially disrupt management of communal services and areas. But the same danger is already there when looking after leases.
The Government’s view is that applications are made when management companies are not behaving themselves. If management companies are reasonable to begin with, there is nothing to fear from these changes.
Our expert view
The watchword of the freeholder service charge proposals was reasonableness, which can mean many things to different people. The Government’s message here is clearly one in favour of homeowners, and those bodies managing communal services and spaces need to play fair and not take advantage of freeholders.
For further information, please speak to our solicitor and real estate expert Bryn Davey.
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