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.
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.