Draft Commonhold & Leasehold Reform Bill: What the Proposed Changes Mean for Service Charge Debt Recovery

The government has just published the Draft Commonhold and Leasehold Reform Bill with the intention to reinvigorate Commonhold, but also to end the use of leasehold.

Whilst the draft proposals will be subject to consultation, and the detailed regulations are some way off, the highlights of the draft bill are:

• The ban on the use of leasehold for new flats.
• The introduction of a process to convert blocks from leasehold to Commonhold.
• The abolition of forfeiture and its replacement with a statutory leasehold enforcement regime.

The abolition of forfeiture has long been foretold, but it is now upon us. This aspect of the draft bill will very likely be one of the first sections that are brought into statutory operation.

The new leasehold enforcement regime will offer a range of remedies to fit the remedy to the breach complained of, and will have statutory protections in place before a landlord will have access to that scheme. Ultimately a leaseholder could still lose their flat for a serious breach, but under the new proposals, such enforcement would result in the loss of the flat but not the equity within it. This equity would remain with the Leaseholder, unlike forfeiture, which provides the landlord with a capital windfall out of proportion to the breach which resulted in the forfeiture.

Consultation will now begin to consider the proposed remedies and the types of small breaches that might be excluded from that scheme.

The guidance to the draft bill makes clear that it is intended to exclude from the new enforcement scheme, smaller breaches, such as the nonpayment of low value debts, which will have to be recovered under normal civil recovery processes. The draft suggests that consultation will begin on what value debts should be excepted from the enforcement scheme and be left with the civil debt recovery processes. The Guidance suggests that the range to be consulted upon is £500-£5000.

The guidance notes the historic imbalance in the relationship between landlord and leaseholder under the leasehold format and makes clear the intention to rebalance that relationship. Whatever one’s opinion of the changes, it is clear that landlords will be in a weaker position after the legislative changes have been introduced and therefore should consider collecting all historic and legacy debts under the existing rules, whilst they have that opportunity. Whilst there have clearly been abusive practices by some freeholders, the prompt payment of fair and reasonable service charges are essential to the management and maintenance of blocks of flats, and if the exception level for debts is set too high, then many blocks will have cash flow issues and may struggle to maintain the required levels of maintenance and repair.

Landlords will have to keep a very close eye on the proposed changes and contribute to the consultation process, particularly in relation to the recovery of service charges, and will have to plan well in advance the required changes resulting from these very significant reforms.

If you would like more detailed discussion and briefing on the proposed legislative changes, please do contact us, we would welcome the chance to discuss these changes with you.

Written by: Mark Oakley, Partner and Head of Property Litigation

Please contact us if you would like more information about the issues raised in this article or any aspect of debt recovery on 0208 290 7350 or email [email protected]