The Leasehold and Freehold Reform Bill, a crucial part of the UK government’s leasehold reform package, recently completed its committee stage with several amendments agreed upon.
This legislation aims to deliver on the government’s manifesto pledge to tackle unfair leasehold practices. The Bill, which is scheduled for report stage on 27 February 2024, is based on recommendations by the Law Commission, focusing on enfranchisement and the right to manage.
The proposed reforms will provide greater flexibility for leaseholders to extend their leases, expand the right to manage including the option to purchase the freehold, and increase standard lease extensions to 990 years. However, the anticipated outright ban on the sale of new leasehold houses was not included in the Bill.
Sale of Leasehold Houses Not Banned
Despite much speculation, the government did not introduce a ban on the sale of leasehold houses during the committee stage.
Another important issue that has yet to be resolved is that of the rates used to calculate the cost for a leaseholder when buying or extending a lease or enfranchisement. Namely deferment rates. The reforms intend to set these rates to reduce the amount of negotiation and argument that takes place when the Premiums (purchase prices) are established for lease extensions and freehold values. These rates are intended to be fixed by the government and detailed in secondary legislation. The aim is to minimize disputes and expedite the lease extension process. How these rates are fixed will make all the difference, and considering the government’s pledge to make extensions and freeholds more affordable for leaseholders, it will will certainly wish to account for that aim within it’s calculations.
Building Safety Amendments Rejected
Unfortunately, proposed amendments to extend the Building Safety Act’s cost protections to non-qualifying leaseholders did not receive support. Thus, landlords with non-qualifying leases will bear the full cost of rectifying building safety defects.
Discussions also centered on the new rights and protections for freehold estate owners. Amendments agreed upon will extend these protections and require leasehold landlords and freehold estate managing agents to join a redress scheme. This will enhance access to redress for leaseholders, who currently have to resort to court proceedings for resolution.
Ground Rent Consultation
The timing of the government’s recent ground rent consultation was a point of debate. The government plans to cap ground rent in existing leases to a ‘peppercorn’, mirroring the system for new leases. However, the consultation just ended, and there’s no indication of when the government’s response will be published, potentially leading to significant changes in ground rent provisions as the Bill progresses. In the current form of the Bill such right to remove the ground applies only to leases that exceed 150 years or more.
The number of amendments the bill has received is substantial, and there has been some critique that some of the proposals have been rushed and as such have not received the due attention to detail or have not been put to sufficient scrutiny and consideration. Within our next article, we intend to break down the most notable of these amendments and what they could mean in practice.
The Leasehold and Freehold Reform Bill was published on 27 November.
This was somewhat sooner than expected, and it is somewhat incomplete.
For example, the Bill does not contain a provision that bans the use of Leasehold for new-build Houses, however a government spokesperson has said “we will bring forward amendments as the bill progresses through parliament and that includes the ban on leasehold houses.”
What does the Leasehold and Freehold Reform Bill mean for leaseholders and landlords?
Here are the key changes:
Ground rents above 0.1% of the freehold value will be disregarded for premium calculations for extensions and freehold purchases, making it cheaper for leaseholders to buy out onerous ground rents
The provisions do indeed provide marked benefits to leaseholders with particular focus on Extensions and Freehold Purchases, both in the price payable, the terms, as well as expending the scope of qualification.
In still remains to be seen whether the bill will be passed by parliament in its current form, which as a matter course still needs to be approved by both Houses of Parliament.
Even if it does, which appears likely, there will be Developers and Landlords who are set to lose a substantial amount of money as a result of these changes and despite Michael Gove’s statements about the Bill not contravening Human Rights legislation, it would not be surprising to see such challenges made once the Act comes into force.
The Bill contains many other impacts that are also worthy of discussion. We shall provide a more in-depth breakdown in due course. In the meantime we welcome opinions on these reforms.
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.
Ahead of the King’s Speech scheduled for the 7th November the Times has reported some insider predictions about both it and on the contents of the proposed Leasehold Reform bill as a whole.
Of course until it becomes law, much of this is highly speculative however we are nearing ever closer to seeing some reforms come to fruition, and as with most new law, the devil will be in the detail.
The following were the changes of note, some more ambiguous than others:-
The penultimate point mirrors what has previously been proposed in relation to the qualification of buildings under Collective Enfranchisement under the 1993 Act and that this effectively brings the qualification in line with the Right of First Refusal threshold under the Landlord & Tenant Act 1987, which will certainly see an increase in the number of RTM and enfranchisement claims. Arguably, as ventured by Philip Rainey KC at a recent lecture, it renders Part I of the Right of First Refusal legislation rather redundant [paraphrased] since the requisite number of leaseholders, if so inclined, could then instigate their own claim no longer restricted by the presence of such large non-residential areas.
Secretary of State Michael Gove has commented that he intends to abolish the leasehold system in totality, describing it as an “unfair and outdated feudal system that needs to go” and it is believed that there are plans for the gradual phasing out of leasehold properties.
It appears the government will likely legislate to ensure that newly built houses can only be created as Freehold interests, although it is said that new flats could still be Leasehold. We can only speculate from previous reports that there may be the introduction of a route to transition leaseholds to a new Commonhold regime.
Rather surprising are the plans to “cap existing ground rents”, which feels somewhat similar the controversial plans to abolish Marriage Value (a factor necessary in the calculation of lease extension and freehold values where leases are below 80 years in length), as this has the effect of directly depriving Freeholders of a significant value in their assets, which some have argued infringes upon Human Rights law. A consultation process is planned to run alongside the bill.
More will be known upon the delivery of the King’s Speech which will hopefully shed more light on these plans.
A shared-ownership lease is a particular type of ownership whereby the Tenant has bought a share of the property (house or flat) and pay rent on the part of the property that is still retained by their Landlord (typically a Housing Association).
The Tenant has a right to purchase additional shares from their Landlord which is a process known as “staircasing” which they can do until they own 100% of the equity and the property is no longer considered shared-ownership, but a regular leasehold.
Although long leaseholders can qualify for a lease extension under the Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”), traditionally it was assumed that these shared-ownership Tenants who have not staircased to 100% do not qualify for a lease due to the contents of the qualification provision in the lease extension law, which defines what type of leases the right to extend applies to. Which under Section 7(1)(d) of the 1993 Act states the following:-
“a shared ownership lease, whether granted in pursuance of that Part of that Act or otherwise, where the tenant’s total share is 100 per cent”
As such, it was widely considered that a shared-ownership Tenant could only extend once they had staircased to 100%.
This understanding has been questioned in recent times due to a court case that concerns the Right to Manage (RTM), which is a different leasehold entitlement, but shares some commonality with lease extension legislation.
This RTM case was entitled Avon Ground Rents Ltd v Canary Gateway (Block A) RTM Company Ltd concerned the question of whether shared ownership tenants who had not staircased to 100% could be regarded as Qualifying Tenants who are able to exercise the Right to Manage.
It was held at the Upper Tribunal that they did qualify as those Tenants fell within a separate sub-heading which stated that their lease merely needed to be “granted for a term of years certain exceeding 21 years, whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenant, by re-entry or forfeiture or otherwise” (s. 76(2)(a) of the Leasehold Reform and Commonhold Act 2002 “the 2002 Act”).
This case was appealed earlier this year, and the Court of Appeal upheld the decision. That decision can be read here: https://caselaw.nationalarchives.gov.uk/ewca/civ/2023/616
The section which concerns which leases qualify for Lease extensions (Section 7(1) of the 1993 Act) mirrors that within RTM law (Section 76(2) of the 2002 Act) and for this reason it has been speculated that the findings in the RTM case should also apply to Lease Extension (and Enfranchisement) law. Indeed, the judgment itself refers to the 1993 Act cases within much of the decision.
It has been speculated that the Court of Appeal decision will itself be appealed in the Supreme Court. If so, there remains a chance that the decision could be overturned. Moreoever it is worth mentioning that the decision concerning RTM law does not categorically mean that the qualification applies to Lease Extensions; although it is a more than reasonable supposition.
As for the big question: Should shared-ownership leaseholders (who have not staircased to 100%) seek to extend under the 1993 Act?
In true lawyer fashion, this must be a “perhaps”. In doing so, one must be prepared for the potential resistance. They much weigh up their financial considerations of a diminishing lease against the potential consequences should the Landlord wish to challenge on this point.
Futhermore, in the event that the aforementioned decision is overturned, we should consider what impact this may have over a completed lease extension.
The legal effect of such Court decisions impact retrospectively; in other words, a Court’s decision on interpretation of statute merely clarifies what should been the legal understanding all along. An interesting question is therefore would such new interpretation give rise to a right of rescission (ending the agreement) for a lease granted under a disqualifying circumstances. We would have to turn to remedies that apply to Contract Law for breaches of condition and warranty; the former giving rise to such a remedy.
Although this goes beyond the scope of this article, I would hazard a speculation that as per our understanding of conveyancing terms the difference may only give rise to a breach of warranty and would therefore not give risk to rescission (termination of the lease extension deed), however that perhaps a question for another time. Ultimately the Court of Appeal decision does for the time does provide relatively strong support in favour of claiming entitlement to a statutory lease extension.
After the tragedy of the Grenfell Tower Fire in 2017 reviews were undertaken by the government which revealed that buildings were not being built with adequate fire resistance cladding. Since that time many Freeholders and developers have been under pressure to bring their buildings into line by instigating major works to repair the situation. Such initiatives resulted in leaseholders being required to the foot the bill for these works, since the mechanism for financing such works under the most leases, classify repairs and maintenance to buildings as being a leaseholder expense to be collected by way of a Service Charge.
Some leases benefit from having a Reserve Fund provision in which a money pot has been collecting over many years to be used on major repairs, but in cases where there was no provision, leaseholders were being suddenly presented with Service Charge demands often spanning thousands of pounds.
Parliament by the introduction of The Building Safety Act 2022 has sought to address this issue, by creating a protections for leaseholders against such charges. In effect, the legislation ensures that those who built defective buildings take responsibility for remedying them, that the industry contributes to fixing the problem, and that leaseholders are protected in law from crippling bills for historical safety defects. The protection is available for any leases granted before 14 February 2022; the rationale being that existing building regulation requirements regulate newly constructed buildings protecting against this problem from that point onward.
That all sounds great, but where do Lease Extensions come into the equation? Well, a lease extension is, legally speaking, a surrender and re-grant of a lease. In fact, the leaseholder’s right to statutory lease extension under the Leasehold Reform Housing and Urban Development Act 1993 is literally stated as the right to a “new lease”. Therefore as things stand there is some doubt as to whether extending a lease at this point will effectively disqualify the property of the benefits bestowed upon it by virtue of the Building Safety Act 2022.
This appears to be quite an oversight by the parliamentary draftsman in the drawing up of the provisions of the Act, but it is one that should undoubtedly be addressed as soon as possible for it does give leaseholders pause for thought when considering whether to extend now. While these protections are quite unimportant for those buildings that are less than 11 meters or five storeys in height (which is the minimum qualification for these protections) those who own flats in high-rise building are rightly hesitant about extending, even as they experience growing pressure to extend or suffer the diminishing value of their asset. In those cases, delays to address the issue by the government effectively cost those leaseholders more the longer they wait as their leases diminish in length, and thus increase the overall lease extension costs.
There is growing pressure upon the government to address this problem, that we hope to be able to report further in the coming months.
The Right to Manage legislation, as enacted under the Commonhold and Leasehold Reform Act 2002, enables groups of leaseholders to join together to claim the entitlement to take over the management of their building.
In many cases, this has worked very well for those thousands of leaseholders who have successfully done so.
However there has been one major criticism of this law in particular in relation to how it deals, arguably inadequately, for situations in which different blocks of flats share the usage of common areas between them. Such as parking spaces, gardens, outhouses, garages and various rights of way over such parts (referred to as “Appurtenant Parts”). The important questions is, “who is responsible for managing these joint areas?”
This difficulty comes from the law that states that only a single RTM Company, formed by those qualifying leaseholders from a building can only exercise the Right to Manage over one single self-contained building in conjunction with the appurtenant parts to which are enjoyed by the leaseholders of that building (as expressed within the terms of their leases). This was the subject matter of the case of Triplerose Ltd v Ninety Broomfield Road RTM Co Ltd.
This creates a potential problem where the separated RTM building is required to manage those areas, but the managers of other blocks of buildings also have those same obligations. In other words it creates a situation of “double management”. Who is carrying out these functions and from whom can they collect service charges for such expenditure?
This problem went to the Court of Appeal in the case of Gala Unity Ltd v Ariadne Road RTM Co Ltd  EWCA Civ 137, and in that case, the court held that indeed the situation of double management was the outcome that accords with legislation, and the court suggested that these parties effectively work out between them how best to share management over these areas. This was understandably considered an unsatisfactory outcome by most practitioners, as there was nothing to compel parties to do so, nor any mechanism for dispute resolution.
However this subject matter has now been further tackled and clarified within the 2022 Supreme Court case of FirstPort Property Services Ltd (Appellant) v Settlers Court RTM Company and others (Respondents). The decision here confirmed that the Right to Manage is only concerned with a restrictive definition of the Building and Appurtenant Parts “enjoyed exclusively” by those leaseholders of the building in question. In other words areas that it can only manage on its own.
While this does assist in the crossover of management obligations with other managerial parties of other blocks.
The Judge, Lord Briggs, in the case, stated that appurtenant property can only be “Physical objects” – not intangible rights of way.
However, this outcome cause potential problems of their own.
How does one define exclusive appurtenant parts?
If all blocks exercise the Right to Manage, then there will be “RTM islands” and “communical seas” that are still managed by the original management company. There is also the question of access to the non-exclusive property, do those leaseholders lose access to areas they were entitled to, they after all can no longer receive service charge demands from the management company who has retained those parts, since their leases are managed exclusively by the RTM company.
It has been suggested that this outcome will likely result in further litigation in order to clarify some of these new points.
However the important take away for those seeking to exercise the Right to Manage for a building which shares appurtenant property with other blocks is that depending on the definition of exclusivity, they may not gain any control over such parts and furthermore could be disenfranchised from them.
It is worth noting that the decision in this case also has connotations for Collective Enfranchisement (purchase of the Freehold), since that process shares much of the qualifying criteria as the Right to Manage legislation.
Parliamentary reforms to the leasehold legislation has been in the works for some time, since the government first announced on 21 December 2017 their intention to address many of the perceived imbalances within the law, in particular the balance of power between Landlords and their Tenants of long leases. The following government article details the history of the initiative.
We have already seen the one such reform being brought into force (see our Ground Rent Act 2022 article), but what is on the horizon?
There have been certain commitments made by the government, however there is much speculation as to how much of it will be brought into force and there are a number of proposals that are considered quite controversial.
Please see our column on “Leasehold Reform” where we provide our take on each of the proposals.
One of the most notable is the abolition of “marriage value”. This represents an formulaic element within the prescribed method of calculation for both Lease Extension and Enfranchisement Premiums (see our guidance pages for an explanation of what these are). In essence, the factor is applicable when calculating the value or of the Landlord’s asset whenever carrying out either of these acquisition claims, and it applies an additional sum payable in respect of any lease that has fewer than 80 years remaining.
Marriage value can represent a significant sum of money, especially in the situation of a Freehold acquisition in which the leasehold flats within have very short leases.
Other significant changes:
For lease extensions:
For Right to Manage and Enfranchisement:
Reintroduction of Commonhold
It will be interesting to see on how such measures shall be brought into force, if at all.
There are many leaseholders who bought new build leasehold properties from developers, in which those leases contained onerous ground rent provisions, often doubling, say, every 10 years. Due to the length of such leases, such a provision can quickly reach astronomical sums potentially rendering the asset at risk of eventual negative equity. This understandably impacted the marketability of such leases and such purchasers were having tremendous difficulty selling such flats.
In September 2020, the Competition and Markets Authority (CMA) launched enforcement action against 4 leading housing developers it believes may have broken consumer protection law in relation to leasehold homes. Taylor Wimpey, for using possibly unfair contract terms, and Barratt Developments and Persimmon Homes over the possible mis-selling of leasehold homes. This was an indicator of what was soon to come in the way of the Ground Rent Act 2022 curtailing such situations from occurring. But this impacts leases granted after June 2022. What about those who already have doubling ground rents, harming the marketability of the those leases on the open market.
If your Landlord is Taylor Wimpey, there is an easy solution, as the CMA secured formal commitments from the developer, such that they will make good those leases to whomever requests this. In practice, in most cases, this comes in the way of the developer agreeing to pay a sum towards the legal costs of the Leaseholder’s solicitor (typically a flat £750) and will assist in enabling the change to from a doubling ground rent clause to one that adopts a calculation that accounts for inflation (via the retail price index -RPI ) in its calculation for how much ground rent is payable at any time. This is certainly preferable to the onerous doubling ground rents. Although, it is curious as to whether even an RPI ground rent provision conflicts with the Ground Rent Act 2022. This writer believes that it does not, considering it will not be considered a ‘new lease’ that would engage the provisions of the legislation.
What about those others who do not have such leases. Until such time that the government may address this with blanket reform, unless the Landlord voluntarily agrees to vary the ground rent provision, the only option that remains is for the leaseholder to apply for a new lease (a lease extension) under the provisions of the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act), or in the cases of Leasehold Houses, the Leasehold Reform Act 1967. In the case of the 1993 Act, a side effect of obtaining a statutory lease extension, is that the ground rent will be reduced to a peppercorn (nil), while certainly the current ground rent is a relevant factor in the calculation of the ‘Premium’ payable to the Landlord in exchange for the Lease Extension, it is not a pure capitalisation, and will most certainly resolve an otherwise helpless situation. We would advise speaking to a Surveyor specialising in lease reform valuations. Contact us for more information.