Law Commission backs commonhold? It’s not that simple for leaseholders

The long-awaited report by the UK Law Commission, which was supposed to deal with the iniquities of Britain’s leasehold property system, is out. Badly put-upon leaseholders, particularly in a post-Grenfell Tower environment, were placing much hope in the commission recommending a system that removes freeholders and lets leaseholders administer their own blocks – commonhold.

But has the Law Commission really backed commonhold (where a block is owned by the people leasing the  flats in it rather than a possibly distant entity known as a freeholder) as a replacement for leasehold? It has set out the issues, proposed ways of making commonhold “work”, and is full of words that give the impression of a strong statement, but the reality is that it in effect concedes the matter will be a political decision. The Commission knew the Government wanted something on commonhold – but also knew it didn’t want to go all the way. The biggest omission is to do with whether commonhold should be the sole form of tenure for owning flats henceforth. The Law Commission hedges around the question.

The problem with leasehold (owning a flat on a lease for a period, often initially set at 99 years though some can be as much as 999 years) from the point of view of leaseholders is basically that the flat is a wasting asset. This means the lease has to be regularly extended ie extra years bought to keep it above the 80 years when costs of extension rise rapidly and it risks becoming unsaleable and unmortgageable (see this on marriage value). There is also ground rent and an unsatisfactory system of deciding on maintenance for the common parts and updating the fabric. The post-Grenfell situation is only the most egregious example of where this can go horribly wrong, with leaseholders vastly out of pocket. It’s a legal minefield and a lawyers’ field of gold.

Who pays for Grenfell-style cladding? The government plan

Various UK government ministers have insisted that those living in flats with flammable Grenfell-style cladding should not have to pay for it to be stripped from their blocks and replaced. The latest view was given by Dominic Raab, Minister of State for Housing and Planning, who told a CIH Housing conference that “leaseholders should not pay those costs. And the private sector should not be let off the hook.”

The legal stituation as it stands is that cost of recladding will very much fall on leaseholders (the people who have bought their flats), as suggested by the Citiscape case (judgment here – not binding but indicative of where we are). So does the Government have a plan? Apparently it does, and Raab’s comments give clues to what it is. In broad terms, this seems to be it:

• The main thrust of the plan will be for those leaseholders who have bought their flats from local authorities or through housing association schemes (such as right to acquire or shared ownership). As the law stands, one would expect the LAs and housing associations to get the recladding done and bill the leaseholders for their share. (Note that other tenants may be in those flats who would never have faced such costs.) Instead:

• The Government will dip into its affordable housing budget and will use it to fund 50% (according to rumours) of the costs of recladding for leaseholders in the above categories. The implication of Raab’s words at the conference is that the local authorities and housing associations will fund the rest of the cost on behalf of leaseholders (as well as the full cost for the rest of their flats in the blocks ie those with tenants rather than leaseholders).

Citiscape cladding case at the Property Tribunal: report

Note: The Tribunal has now [March 2018] ruled against the leaseholders; report here.

The first battle in the tortuous struggle over who pays what for post-Grenfell tower block cladding has shown how complex this issue is going to be – but also offered some clues as to how the battle lines will be drawn up. One of the leaseholders of the Citiscape blocks in Croydon, south London, made a compelling submission to the Property Tribunal in London to explain why leaseholders should not have to pay for replacing allegedly dangerous cladding.

New government regulations require blocks to be stripped of cladding of the sort assumed to have been the cause of the Grenfell Tower fire tragedy in Kensington, west London, last year.

The issue of who pays will come down, not to who has the most money – freeholders or leaseholders – nor to the “moral case” according to Sajid Javid, Secretary of State for Housing (that “the tab should be picked up by the freeholders of those properties”). It will come down to interpretation of the leases between freeholders, who own the land (and hence are paid annual ground rents), and leaseholders who have bought flats in the blocks up and down the country (and hence have to pay the annual service charges for work on the buildings and administration).

The flats are bought on leasehold which means they revert back to the freeholder after a term of years – in the Citiscape case 999 years in total (they were built in 2004). This period is deemed “almost freehold” (ie almost as if the leaseholders owned outright), and that fact may have a bearing on the eventual outcome of the case. Note also that not all leases are the same, so the Citiscape case may give clues for other cases (of which there are likely to be many) but won’t be a precedent.

Neuberger explains his Arnold v Britton judgment

Lord Neuberger, President of the UK Supreme Court, has offered useful insight into his intentions behind the controversial Arnold v Britton judgment that left holiday chalet leaseholders facing bills adding up to millions of pounds for services (critiqued here: Neuberger abolishes common sense).

In a talk to members of the Leasehold Valuation Tribunal* he underlined his commitment to a literal approach to be taken by courts when reading contracts, leases and legislation. But he rejects any suggestion that he has “changed the law” with the Arnold judgment. He considers the judicial art of “construction” – construing the true meaning of the document in question – and sets his judgment within the context of 40 years of judicial contractual interpretation. 

Construction
A judge’s role in “construction” or interpretation of contracts, is to identify the intention of the parties “by interpreting the words used in their documentary, factual and commercial context”, Neuberger said [referring to a case on wills in which he had made this point last year, Marley v Rawlings.] 

The principles for construing contracts and legislation were similar and leases should be treated no differently since, like contracts, they have “commercial consequences”.