The Leasehold and Freehold Reform Bill was first introduced in the commons on 27 November 2023. Whilst it was making fairly swift progress through parliament, when the election was announced, it was not expected that the Bill would make it through “wash-up”. However, late on Thursday 23rd May, the Bill was added to the list of legislation being debated by the Lords on the final day before Parliament was prorogued. It was passed and received Royal Assent on the Friday.
Rushed legislation is seldom good legislation, especially when it is as complex and far reaching as this. Pushing the Bill through wash-up cut short the consideration time and scrutiny which the bill would usually have received, and there is concern in the sector as to the likely issues that this will cause. In particular, some have voiced concerns that there may be unconsidered long-term consequences following the changes to freehold valuations and costs liabilities, which may not be good news for leaseholders. The Act also fails to distinguish between different types of leaseholders and landlords, potentially resulting in large buy-to-let investors who own leasehold properties receiving unintended benefits, whilst resident leaseholders who have purchased their freehold end up being penalised.
A week on from the Act receiving Royal Assent, we look at what we know, and what we don’t know, about the changing landscape for leasehold, and the road which still lies ahead.
What we know about the new leasehold landscape
At the time of writing, the final text of the Act has still not been published. However, we know that the world of leasehold is set to change.
In particular, the Act makes reforms to a number of areas, including:
- Restricting the use of leasehold for new houses: The Act will ban new leases being granted for houses (from the date the relevant section comes into force), and should any leases be granted in breach of this ban, the Act also bans selling any leases granted after the relevant date. The ban is backed up by potentially significant monetary penalties for being in breach – this includes penalties for selling and also marketing any prohibited leases. There are a number of exemptions to the ban, however, including for shared ownership houses.
- Longer lease extensions: Lease extensions of both flats and houses will be granted for 990 years.
- Making lease extensions and enfranchisement claims cheaper for leaseholders:
- Marriage value (an additional sum payable in relation to leases which have fewer than 80 years remaining) will no longer be payable by leaseholders.
- The valuation methods for calculating how much a lease extension or freehold purchase will cost has also changed. The deferment and capitalisation rates are to be fixed for a period of 10 years by the Secretary of State. Further, for valuation purposes only, ground rents will be considered to be capped at 0.1% of the market value of the property. It is expected that this will reduce premiums, but until the rates are known, we will not know for certain.
- That said, a leaseholder may choose to use the current valuation method under the Leasehold Reform Act 1967 if they would have qualified for the cheaper valuation method (under section 9(1) of the 1967 Act). This may work out cheaper than the new valuation method, and tenants will need to seek specialist valuation advice to understand which is the most favourable option and consequently the process which must be adopted for such claims.
- Instead of leaseholders being liable for both their own and the Landlord’s costs, both parties will now pay their own costs when following the statutory procedures (except in a few specific situations, such as where the premiums are particularly low, however further detail is awaited from the Secretary of State).
- The Act also makes changes to leaseback provisions in collective enfranchisement claims. This includes a new right for those participating in collective enfranchisement claims to require the landlord to take a leaseback of non-participating flats. This will likely reduce the premium payable for the acquisition of the freehold.
- Previously, when a lease of a house was extended, the rent would not be reduced to a peppercorn, but rather changed to a “modern ground rent”, which for many would have been an increased ground rent. The Act changes this to bring houses in line with flats, and lease extensions for houses will now be granted at a peppercorn ground rent on payment of a premium.
- Removing barriers to lease extensions, right to manage and enfranchisement claims:
- The Act removes the requirement for a leaseholder to have owned the property (or more specifically, been a qualifying tenant) for a period of two years prior to making a claim for a lease extension of a flat or house, or a claim to acquire the freehold of a house.
- The change of the non-residential limit on collective enfranchisement and right to manage claims, increasing the number of buildings which may qualify for the leaseholders to collectively acquire the freehold of their buildings or the right to manage their buildings.
- Clarifying the position for shared ownership leases: The current position for shared ownership leases has been a grey area, relying on case law to establish the rights of shared ownership leaseholders in respect of lease extensions and enfranchisement claims. This has caused many issues over the years, and the Act now clarifies the position:
- There is a right to extend the lease of a either a shared ownership house or a flat. The Act sets out how it is to be valued and provides that any rent payable in respect of the landlord’s share will continue to be payable in line with the lease.
- Shared ownership leaseholders will not have a right to acquire the freehold of the house separate from the staircasing provisions contained within their lease.
- Shared ownership leaseholders will not be qualifying tenants for the purposes of a collective enfranchisement claim to acquire the freehold of a block. The landlord will be required to take a mandatory leaseback of the shared ownership unit, preserving the shared ownership relationship following the enfranchisement claim.
- A new right for leaseholders: in certain cases leaseholders will be entitled to reduce the rent in the lease to a peppercorn without having to extend the lease at the same time. This will still require the payment of a premium, but it will be a lower premium than would be payable if the lease were extended at the same time.
- Changing how charges are recovered from homeowners:
- The Act makes fairly significant changes to the service charge obligations and new obligations around service charge demands and while this will increase the obligations of the landlord/manager, it will provide greater transparency to the leaseholders.
- Landlords will be required to publish a schedule of their administration charges, and without such a schedule, administration charges are not recoverable from leaseholders.
- There are changes to how Landlords are to place insurance, and limits imposed on the costs that can be recovered from the leaseholders in this regard.
- The Act also makes changes to the estate charge system in relation to freehold houses, to bring it more in line with service charge obligations.
What will not form part of the new landscape (at least for now)
The Act makes significant reforms to the leasehold landscape. However, there are certain reforms which received a lot of media attention during the life of the Bill which have not made it into the Act. Who knows what the future holds, but at least for now these will not form part of the leasehold landscape:
- The abolition of leasehold – Whilst Michael Gove might have hoped for a wider-reaching legacy, the Act does not abolish leasehold, except for new houses.
- The abolition or capping of ground rent for existing properties – This was one of the most hotly debated proposals to be discussed around the Bill’s introduction, but it has been left out of the legislation for now.
- Amendments proposed by the House of Lords – Rushing the Bill through wash-up meant that the numerous amendments proposed by the House of Lords were not duly considered. Some of their suggested amendments included power for the Secretary of State to introduce regulation of estate agents, and provisions which sought to differentiate between different categories of leaseholder and landlord. For instance, it was proposed that leaseholders whose property was their main residence be differentiated from buy-to-let investors who did not live in their leasehold properties. Similarly, leaseholders who had already purchased their freehold were proposed to be differentiated from investor landlords. Further, the Lords suggested a “grandfathering” proposal that marriage value would only be removed from valuations for leases which fell below 80 years after the date of the Act. However, these amendments did not make it into the final Act.
- A reformed Commonhold – Commonhold has received lip-service as an alternative to leasehold, but the current law requires significant amendments to make it even potentially viable. The Law Commission set out proposals in 2020, but the Act does not incorporate any amendments to the current law of Commonhold.
The great unknowns of the new landscape
Whilst we know what changes the Act sets out, there is much which is still unknown.
- Commencement: Only four provisions in the Act will come into force on 24 July. These relate to rentcharges and the Building Safety Act 2022. The remainder of the provisions will come into force once the Secretary of State sets a date. As such, we do not know when (or even if) the provisions will come into force.
- The finer detail: A lot of the precise detail is left for secondary legislation, such as the rates to be used in the valuation calculations. Until we see the proposals for this secondary legislation, the precise effects of the Act are difficult to establish. In light of the general election, it is yet to be seen what political appetite there will be for introducing such secondary legislation quickly, and what direction it will take.
- Potential challenges: It is currently a matter for debate as to whether landlords may attempt to challenge the legislation, and the nature and outcome of any such challenges is unknown. These may take the form of human rights challenges arising out of the A1P1 rights to enjoyment of property; for many the removal of marriage value will overnight remove a significant value from their portfolio.
- Long term consequences for landlords and leaseholders: Whilst the Act has been promoted as being good for leaseholders, some elements of the longer-term picture are another topic of debate.
- The new landscape may lead to some landlords becoming insolvent or going into administration, and this may have challenging effects for leaseholders.
- The provisions requiring each party to bear their own costs may now lead to a “race to the bottom” amongst practitioners, meaning more instances of low-quality legal and valuation advice, in turn leading to more drawn-out transactions, and more matters having to go to tribunal.
- There may be significant impacts for pensions and other trusts who are invested in ground rent portfolios and the wider economic ramifications of this are, as yet, unknown.
- There may also be a financial impact on registered providers and local authority landlords. Receiving less income from lease extensions and incurring higher costs may lead to such providers having less income to spend on providing much-needed housing.
- For leaseholders who have already purchased their freehold, if there are non-participators in the building, they would expect to receive the cost of that non-participators share at some stage in the future. Those non-participators are likely to now be able to buy into the freehold at much lower rates than expected, which would seem to unduly penalise leaseholders who have already enfranchised.
Making plans for the road ahead
For leaseholders, it is not wholly black and white whether you are best to wait for the reforms to come into force or proceed at the current time. If you are considering extending your lease, looking to sell your property, or have a lease which is close to 80 years remaining, it would be worthwhile taking specialist legal and valuation advice. We would be very happy to discuss your options, and the potential benefits and downsides of each. We can also put you in touch with specialist valuers who can help you understand which is likely to be the most cost-effective way forward.
For landlords, we would suggest now is an important time to be reviewing your portfolios in light of the valuation changes, in particular the reduction of marriage value. We would be happy to discuss this with you, and any options which may be open to you, and can put you in touch with specialist valuers who will be able to assist further. We would also suggest discussing your approach to lease extensions and enfranchisement claims with us, to understand your options in dealing with these economically and viably.