It was long speculated that the Leasehold Reform Bill would hit the statute books in advance of the next general election. With the snap election having been called, we saw the Bill pass the House of Lord’s third reading and consideration of amendments on the 24th May, leaving only the foregone conclusion of Royal Assent.

The Bill had been the subject of numerous amendments. The most recent of which being tweaks to the subject of indemnity of statutory costs for lease extensions and enfranchisement, effectively providing for possible future exceptions in the form of amendments via a regulations (secondary legislation made by the Secretary of State). These open opportunities have been widely criticised as leaving an inadequate level of certainty on such topics.

Moreever this method is also used for some important calculatory mechanisms. Such mechanisms are highly influential, such as the setting of capitalisation and deferment rates which greatly impact the ‘Premium’ payable for Freeholds (via Enfranchisement) as well as lease extensions.

Many, including those within the House of Commons have stated, quite fairly, that the progress of the bill’s movement through parliament has been rather rushed and haphazard, and has not stood sufficient parliamentary scrutiny.

However it is undeniable that the Act will make it easier and cheaper for leaseholders to buy their freehold, increase standard lease extension terms to 990 years for houses and flats, and provide greater transparency over service charges. The Act will also remove barriers for leaseholders to challenge their landlords’ unreasonable charges at Tribunal.

It will further ban the sale of new leasehold houses other than in exceptional circumstances, end excessive buildings insurance commissions for freeholders and managing agents, and remove the requirement for a new leaseholder to have owned their house or flat for two years before they can buy or extend their lease.

The new powers also grant freehold homeowners on private and mixed tenure estates the same rights of redress as leaseholders, and equivalent rights to transparency over their estate charges, and help more leaseholders take over the management of their property should they wish. Leaseholders who previously could not exercise the Right to Manage or purchase their Freehold due their building containing over 25% non-residential areas and therefore were ineligible, can now do so thanks to the increasing of this threshold to 50%.

Most significantly, and most controversially, the removal of the ‘marriage value’ component of Freehold and Lease Extension calculations, will account for a significant transfer of wealth from landlords and to tenants, estimated in the billions (approximately £6.6-7.1 billion pounds). Despite this there are campaigners that believe the Act has not gone far enough, specifically as the capping of existing ground rents is absent from the legislation despite being one of the aims that dates back to the law commission reports. It is worth noting also that the Renters Reform Bill was unable to reach a similarly conclusive stage compared to the Leasehold Reform Bill ahead of the next General Election.

In respect of the Leasehold and Freehold Reform Act, there is still some unknowns, particularly as to the commencement date for when the legislation comes into force. There were predictions made within the House a Lords a few weeks ago that estimated that this may be as late as next year (2025). We will be certain to report once more is known.

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:

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.

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.

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