The King’s Speech took place on 7th November 2023. The segment on the proposed leasehold reform bill was disappointingly brief and vague at time when the industry is markedly desperate for detail; however the King’s Speech briefing notes contained a bit more detail and covered a wider range of topics. You can read the extract of the relevant pages of the briefing note here:-
In this article we give our explanation and commentary on each of those notable components.
From the advent of the 1993 Act, leaseholders have been entitled to claim a new lease that grants an additional 90 year term. A leasehold property which falls below 100 years begins to pose a marketability problem and thus encourages another extension, for this reason it is not unheard of that some leasehold properties have already withstood two statutory claims within the last 30 years, and as it stands this pattern would continue in perpetuity. By increasing this to 990 years, it effectively diminishes the long term investment of such assets for landlords, and moreover since a Freehold value is highly dependent on the reversion (in other words how short the leases are in the estate) extended leases of 990 years will have a negligible impact on that equation rendering a Freehold that has been subject of multiple 990 claims cost a significantly cheaper premium. It will be of interest to see if the calculation method will be tweaked in any way to account for the differential.
Most mortgage lenders will out-rightly refuse to finance the purchase of a leasehold property which has a term of fewer than 80 years remaining. In a case where a leasehold property is approaching this range, but not to the extent that a Lender will refuse to finance, then it is quite common to see Purchasers wishing to do something about the short lease issue now rather than wait two years, especially as those 2 years certainly represent an increase to the Lease Extension price due to the general understanding that the Premium will rise the shorter the Lease length becomes. Many practioners will in such a case advise that the Vendor commence the lease extension process and have the statutory claim assigned to the Purchaser, thereby enabling him to avoid this 2 year ownership requirement.
While that is certainly a commonly used solution, it is arguably not ideal and places much pressure on transactional parties at a time when they have many other concerns to be dealing with. The change will likely reduce the number of these “assignment of claim” processes.
The change may most significantly impact situations where a lease is especially short, where such sales are limited to those who can fund the purchase via cash only; and amongst these, auctioned properties, where it may not be possible for the Vendor to even initiate a statutory lease extension claim. For these types of properties that two-year waiting period can account for tens of thousands of pounds as a result of waiting those 2 years before being able to commence a statutory claim.
The widening of this threshold brings Enfranchisement (a claim to purchase the freehold) and the Right to Manage in line with the same test used under the Right of First Refusal, which is a pre-emption right that only arises where the Freeholder makes a voluntary disposal of the property. The main difference of course being that the former are initiatives commenced by the leaseholders, whereas the latter only arises by a discretionary decision by the Freeholder. Under the Leaseback provisions of Collective Enfranchisement, the Landlord can insist on leaseback over its commercial parts, thereby retaining ownership over those particular assets (unless it neglects to request this within its Counter Notice). This change will certainly increase the number of Enfranchisement and Right to Manage claims that are possible.
What is being referred to here are leasehold enquiries that are posed by a Purchaser’s conveyancer often using a particular standarised form known as an “LPE1”. Landlords who use managing agents will typically respond to such a request by selling a preliminary enquiries pack providing the answers to such questions and typically within this pack would be a copy of the building insurance certificate as well as service charge accounts and ledgers. The price that is set for such packs are currently unregulated by leasehold legislation and although leaseholders currently have some options to legally acquire some of this information by serving certain information notices (under LTA1985), they do not cover the breadth of information posed by the LPE1, meaning that a Purchaser can still insist on the receipt of such answers, this in turn means that the Vendor is at the mercy of the Landlord or their agent.
Moreover, unlike other kinds of charges that Landlords and agents levy on leaseholders, such as things like consent fees, enforcement charges, etc. such information packs do not fall under the same regulated regime as those due under the terms of a lease, which is why they are not deemed to be “administration charges” which are a type of cost that can be challenged via an application to the Tribunal on grounds of reasonableness. So this proposal seems to be geared at closing this loophole, perhaps by bringing it in line with the administration charge provisions.
There are certain inherent entitlements leaseholders have over such service charge information. These procedures can be dictated within the terms of the lease, e.g. annual budget and end of year calculation summaries, or in the case of major works, the consultation provisions under Section 20 of LTA1985.
But for anything more detailed, such entitlements only arise if the leaseholder (or recognized tenants association) serve notices (s21 and 22 of the LTA1985) to acquire such detailed breakdowns.
The proposal appears to imply that there will be obligations for landlords and agents to provide such breakdowns within ordinary routine operation. If is difficult to tell the extent the extra burden (if any) will place on landlords and agents, if it is significant, one would have thought that this could have an impact on managing agent fees.
Service Charges are effectively trust fund monies, in other words they do not belong to the Landlord, but are held on behalf of the leaseholders. This has meant that Freeholder and agents could take commissions for choosing particular service providers since such commission itself is not a levy on the leaseholders. However it allows freeholders or their agents to agree higher premiums for cover with brokers, benefiting the underwriter and allowing brokers to take a larger service fee themselves which is then often cut back to the freeholder as a commission. It’s the leaseholders who pay for these higher premiums.
The government’s stance on this point likely came from the quite recent Canary Riverside ruling in which the First-tier Tribunal found that commissions of £1.5m and related insurance premium tax of £121,338 paid to the freehold between 2010 and 2019 were not reasonably incurred to the leaseholder.
At present if a Landlord/Agent is not carrying out its own managerial obligations under the terms of the lease, the Leaseholders effectively have two options. 1) they can seek to take over the management themselves, either via the Right to Manage, or the Tribunal Appointed Manager proceedings, or Compulsory Purchase under the 1987 Act or 2) they can try to enforce the terms of the contract via the County Court to seek an injunction or order for specific performance. Each of these two options can be quite protracted or costly for what arguably should be the subject of a more direct route of specific enforcement, so one can see the logic in the creation of such a remedy. It will be interesting to see what such a remedy would entail.
As things stand, most leases contain something commonly referred to as a “sweeping up clause”, which basically means that a Landlord can seek to recover its legal expenses for dealing with any applications in connection with the management of the estate.
Effectively this means that if a leaseholder takes the Landlord to Court or the Tribunal, the Landlord will likely finance their legal costs via the Estate Service Charges. There is a provision in law, under Section 20C of the Landlord and Tenant Act 1985, which prevents a Landlord from seeking reimbursement via the Service Charges, however, this has to be applied for by the Tenant within the context of proceedings, and the Tribunal is only able to grant this so long as it deems it “just and equitable” to do so – in other words, it only typically occurs when the Tribunal is convinced the Landlord/Agent has been particularly awful.
So what is being suggested here appears to nullify such sweeping clause to protect landlords against such applications made against them.
This could be quite controversial, as while certainly the Landlord could be in the wrong, but what in cases where the leaseholders launch a spurious claim?
I would speculate that the enforcement of such costs would be linked to who wins the judgment.
At present, there is a distinction between what Freehold House owners pay towards the estate under the terms of their Transfer Deed which is often referred to as an estate maintenance charge, and what long leaseholders have to pay which are distinctly defined as Service Charges. Freehold owners do not currently have the same protections afforded to leaseholders who are able to challenge unreasonable service charges at the Tribunal (27A LTA1985).
It is unclear of what extension measures they intend to make. For one, it is notable that the Building Safety Act only applies to houses that are over 18m in height, or at least seven storeys. Perhaps a lowering of that threshold would be welcome considering that there are properties that are shorter in height that can still have the defects and risks complained of.
This proposal seems to be one of the most likely to end up on the statute books. As the King’s Speech briefing notes claim, only 6% of houses in the UK are sold on a leasehold basis so a relatively modest number. Those developers that did favour this model will no doubt need to adjust their investment expectations as they will not be afforded the premiums resulting from 1967 Act claims (to extend or buy out the freehold). Whether we see such houses attracting a higher lump sum as a result is yet to be revealed.
Historically Ground Rents were “the rent at which land is let for the purpose of improvement by building, i.e. a rent charged in respect of the land only and not in respect of the buildings to be placed thereon” (Renton).
However the contemporary understanding is that rent is deemed a pure profit income for the Landlord, and not in consideration for any particular service. They are simply a benefit factored as part of the asset originally purchased.
To simply cap existing ground rents arguably deprives Landlords from a contractually entitled asset, and as with the accompanying proposal to remove “marriage value” (although in the latter case, a statutory entitlement), there will be arguments from Freeholders that this measure is contrary to Article 17 of European Convention on Human Rights, namely that everyone has the right to “own, use, dispose of and bequeath his or her lawfully acquired possessions”.
On the flip-side of course, a leaseholder having to pay a ground rent for no consideration when they have already outlaid a market value price to acquire the property in the first place does not seem altogether fair. Especially as such purchase prices do not see any impact whether there exists a ground rent, or a nil (peppercorn) ground rent (except in extreme cases of course where it can impact marketability).
These components of the reforms signify the most impactful and controversial, out of those proposed and it shall be of great interest to see how the consultation process unfolds and whether such propositions eventually see the light of day.
This is been a much discussed topic in recent times due to a, likely unintended, impact of a provision in the Housing Act 1988, that a long leasehold could be deemed to be an Assured Shorthold Tenancy (AST) if the ground rent exceeded £250 outside London, or £1000 within London. It has been pointed out that this effectively means that while a long leasehold must follow through with a protracted forfeiture procedure if the Landlord wishes to seek to repossesses the property due to a breach of lease, in the case of an AST a Landlord theoretically merely needs to serve a Section 21 Notice to Quit. Once mortgage companies got wind of this, many of them narrowed their criterion for acceptable ground rent ranges.
However before that, this level of increase by inflation was not seen as being significantly onerous. One could argue that the an amendment to the Housing Act could solve the most substantial issue of marketability, however on the other hand, the ground rents can be argued as being by nature an unreasonable burden on a leaseholder who has already paid a substantial Premium to purchase the property.
Lease extension premiums are calculated by reference to the value of the flat, how short the remaining lease is, and finally how much ground rent is payable. This case study makes no mention of the other two factors involved, yet it implies that the price is reflected purely based on the level of ground rent payable.
It has been speculated that the equation has removed the ‘marriage value’ component which applies to leases that have fewer than 80 years remaining.
Another notable thing is the estimation of £10,000 in costs, that I find to be an inflated figure. A leaseholder claiming a lease extension has to pay their own solicitors fees as well as their own Surveyor’s fees, and plus they also have to pay their Landlord’s legal and valuation costs, (which are limited to reasonableness under Section 60 of the 1993 Act). If the price is excluding VAT, this suggests that the fees amount to £8000+VAT.
From the reported tribunal decisions on challenges of such costs, I believe that this is an exaggeration, especially when this appears to be a property in Birmingham, that even if the Landlord is using London grade solicitors, the valuer, as well as the leaseholder’s own representatives would most certainly be local.
In Conclusion, politically there has been doubt as to whether the any of these reforms will be enacted in advance of the next general election. We are paying attention to the parliamentary debates on these topics and like others in the industry await substantive news with bated breath, in the meantime we welcome further discussion on these subjects.