The unintended consequence of the use of wording within the qualification section of the Building Safety Act 2022 meant that leases which underwent the extension process were excluded from that qualification; this is something we reported on within following article: http://lease-advice-bureau.co.uk/does-the-building-safety-act-2022-impact-lease-extensions/
We are pleased to report that this error is soon to be addressed in the form of an amendment to the Levelling-up and Regeneration Bill 2023. Amendment #243 of this states that “A qualifying lease varied, or subject to any surrender and regrant, remains a qualifying lease”, and that this will take effect retrospectively.
This is good news for those who live in high-rise buildings and were quite rightly holding off on extending their lease due to the concern of severing oneself from the receiving those protections afforded by the Building Safety Act, principally being safeguarded against costs that should be levied against the original developer for inherent building defects, as those covered by that legislation.
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.
Any new residential leases created after 30th June 2022 are subject to the provisions of this legislation. The legislation prohibits leases granted after this date from carrying a ground rent aside from a ‘peppercorn’, which means Nil. Apart from new build leases created by Developers, this legislation also impacts lease extensions, since these are “new leases”, and therefore prohibits lease extensions from carrying provisions increasing the ground rent beyond those that are were expressed within the current lease.
In other words, a new lease extension may continue to provide for the same ground rent as contained in the current lease, but from the commencement of the extended period, the rent must become a peppercorn (nil).
A Landlord that seeks to collect illegitimate ground rent from such a qualifying lease will be liable for penalties under the provisions of the Ground Rent Act 2022.
The advent of this legislation will certain have an impact on the number of “informal” lease extensions granted by Landlords, considering one of their main motivations for granting such lease extensions was to increase the ground rents due under the lease, thereby increasing the value of the freehold. Which is something that could never be done under the statutory regime method which requires that ground rent must be reduced to a peppercorn. As such, Landlords no longer have a vested interest in being pro-active in the grant of lease extensions, and the prediction is that many will simply await the receipt of a formal claim notice (known as a “section 42” notice) from a leaseholder before cooperating with the grant of the extension. This Act is the first stage in a list of proposed leasehold reform by the government. It remains to be seen to what extent other proposals reach the statute books, but we eagerly await new developments.
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.