Leasehold and Freehold Reform Bill

Leasehold reform has been on the cards for a long time. Following publication by the Law Commission of a series of reports in July 2020, the government announced a wide range of reforms.

However the only piece of legislation that has actually made it onto the statute books to date is the Leasehold Reform (Ground Rent) Act 2022 which limited the ground rent chargeable in most long residential leases granted after 30 June 2022 (and after 1 April 2023 for retirement homes) to a peppercorn per year, effectively restricting ground rents to zero.

That’s about to change with the introduction of The Leasehold and Freehold Reform Bill to Parliament on 27 November 2023.

The main highlights are –

Leasehold enfranchisement and extension

• Abolition of the requirement for leaseholders to have owned a leasehold property for two years before they can enfranchise. This will bring the Leasehold Reform Act 1967 (LRA 1967) into line with the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993).
• Extending the term of any lease extension to 990 years, with ground rent reduced to a peppercorn on payment of a premium (currently, a qualifying leaseholder is entitled to a 90 year extension for flats and a 50 year extension for houses).
• An extension of the buildings subject to enfranchisement rights and the right to manage to those with up to 50% non-residential use (currently 25%).
• Abolition of marriage and hope value, by altering the statutory assumptions. This reduces the valuation methodology to a simple ‘term’ and ‘reversion’ calculation, and is likely to reduce premiums for shorter leases in all cases and longer leases in enfranchisement claims.
• A standard valuation method to be used in all but limited cases, making it cheaper for leaseholders to extend their leases or acquire the freehold. The government will prescribe the capitalisation and deferment rates used to calculate the enfranchisement premium in due course. However, if a valuation under the existing provisions of the 1967 Act would be more favourable, then a leaseholder will be entitled to elect the most favourable valuation method.
• Capping ground rents to 0.1% of the market value of the freehold interest when calculating an enfranchisement premiumfor higher ground rents (to address the issue of escalating ground rents or those subject to a review by reference to the freehold vacant possession value).
• Leaseholder rights to vary long leases with an unexpired term of at least 150 years, to replace the rent with a peppercorn without extending the lease term, upon payment of a premium.
• Landlords will no longer be able to oppose a claim on the grounds that –

- they intend to redevelop the property

- they will be a resident landlord, or

- the land is required for public purposes.

• Reversing the current position regarding legal costs: instead of leaseholders having to apply to court or the Property Tribunal to limit their liability for landlord’s legal costs, landlords will have to apply if they want to pass any or all of their legal costs on to leaseholders, who will only have to pay in limited circumstances.

Service charges

• A new prescribed form for service charge demands and annual account requirements, together with a right for leaseholders to obtain service charge information on request.
• A duty on landlords to publish administration charges schedules.
• Replacing buildings insurance commissions with transparent administration fees, to remove incentives for landlords and managing agents to maximise their own remuneration.
• Extension of regulation to fixed service charges and freehold estate management charges.
• Rights of leaseholders to claim litigation costs from the landlord (if the court or tribunal deems it just and equitable).
• Increasing the Property Tribunal’s jurisdiction to save leaseholders having to apply to court to force their landlord to remedy poor performance.

Current ground rent consultation

The Bill does not say anything about capping ground rents for existing leases, as the government is currently consulting on this - Modern leasehold: restricting ground rent for existing leases. However, the Bill expressly reserves the right to add amendments to the Bill as the government deems necessary.

The consultation, which runs until 17 January 2024, seeks views on five different options for overriding lease drafting and capping ground rents. These are -

• Capping to a peppercorn (effectively nil)
• Capping to a maximum value
• Capping at a percentage of property value
• Capping at the original amount of ground rent when the lease was granted*
• Freezing at current levels

Human rights implications

The consultation states - 

Regardless of the option taken forward, we would not expect to compensate freeholders for lost revenue, nor do we expect freeholders would be able to capitalise the lost income stream though other means

Michael Gove has said that, in his view -

the provisions of the Leasehold and Freehold Reform Bill are compatible with the Convention rights.

This is open to debate. Article 1 of the European Convention on Human Rightsstates that individuals are entitled to peaceful enjoyment of property although it provides a caveat that any deprivation is allowed if it is “in accordance with the general interest or to secure the payment of taxes or other contributions or penalties”.

The “general interest” must surely include investors (including the millions of people with pension funds), who will need to top up their ground rent portfolio shortfalls.

COMMENTS

990 year lease extension

The 990 extension is not as ground-breaking as it sounds. Currently the law allows a leaseholder to make a succession of claims, one after the other, without any gap between claims, so a leaseholder can effectively construct a 990-year interest anyway.

Deferment and capitalisation rates

The calculation of enfranchisement premiums involves, in part, applying a capitalisation rate and a deferment rate. Valuers often disagree about these rates, leaving the premium open for negotiation. By prescribing the rates used in calculating the price, the government hopes to remove a key source of disputes, making the process simpler, more certain and predictable.

Marriage value

The law currently provides that a leaseholder only has to pay marriage value where the term of its current lease has less than 80 years remaining, so for leases with more than 80 years to run, this change will have no effect on value although it will impact significantly on leases with residual terms below the threshold.

Mixed use schemes

The proposal to increase the floorspace requirements for mixed use properties from 25% to 50% was covered in the consultation which closed in February 2022. Unsurprisingly, the vast majority of investors disagreed with the proposals, arguing that –

• They will impact on existing mixed-use schemes, many of which were designed specifically to avoid enfranchisement and right to manage rights.
• Developers consider the ability to guarantee freehold ownership as essential to securing investment for mixed-use development schemes, whilst investors are looking for regular, long term, guaranteed returns and reassurance that value will be safeguarded by professional, long-term management.
• The value of any interest an investor retains in a development after a successful enfranchisement claim would be adversely affected by leaseholder-led management, if that management is of a poor quality.
• At the very least, developers are likely to modify their schemes to include larger commercial parts, either by including more non-residential units or more residential units as built to rent rather than for sale as leasehold, thus reducing the supply of housing for sale.

However, the government agreed with the Law Commission that where half or more of the floorspace of a building, excluding common parts, is occupied for residential use, it can reasonably be considered a residential building. It believes that a 50% limit provides a more accurate measure than the current 25% limit of whether a building is residential. 

Leaseholders believe that the development of mixed-use buildings is becoming more common and that the time is right to amend the non-residential limit, which has not changed since it was increased from 10% to 25% in the Commonhold and Leasehold Reform Act 2002. 

They also believe that improved access to right to manage will incentivise improved management of buildings by managing agents/landlords, if poor performance could be removed via enfranchisement.

However, leaseholders may end up taking on much more than they actually want, firstly in terms of the acquisition price, if the commercial elements are profitable, and secondly by having responsibility to manage a much more complex building.

OMISSIONS FROM THE BILL

• Despite numerous initial headlines to the contrary, the Bill says nothing about the much trumpeted ban on the sale of new leasehold houses. Government officials have said that appropriate clauses will be inserted into the Bill via a government-backed amendment in the Commons or Lords. However, the government’s intention to ban the creation of new leasehold houses was made over four years ago and has largely been factored into the property market.
• In January 2021, the government said it would be “reinvigorating commonhold” including the establishment of a Commonhold Council. However, there’s nothing about commonhold in the Bill and as a concept, it has always struggled to get off the ground. 
   

Find out more about the services offered by our award-winning Property Litigation here and our Commercial Property here.

The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.