Summary

Just weeks after we reported on the housing proposals referred to in the King’s Speech (Reforming the Housing Market: A word from the King (cms-lawnow.com)), the Government on 27 November 2023 introduced the Leasehold and Freehold Reform Bill (the “Bill”) to Parliament, the next step in its long-promised programme of reform to ‘improve home ownership for millions of leaseholders in England and Wales’.

Whilst the Bill and many of its inclusions come as no surprise, there are some newly introduced provisions. It is focused on residential property and has wide-reaching impact for mixed-use schemes, increasing the number of mixed-use buildings which can now be subject to leaseholder rights to manage and acquire the freeholds (known as enfranchisement). 

Enfranchisement, Lease Extensions and Right to Manage

The Government has been committed to its aim of making enfranchisement ‘cheaper and easier’ for residential leaseholders.  The Bill Leasehold and Freehold Reform Bill - Parliamentary Bills - UK Parliament makes the following changes for England and Wales:

  1. Abolition of the requirement to have owned a leasehold property for two years before being able to rely on certain statutory rights;
  2. An extension of the term of any lease extension to 990 years with ground rent reduced to a peppercorn on payment of a premium (currently, a qualifying leaseholder is entitled to a 90 year extension for flats and a 50 year extension for houses);
  3. An extension of the buildings in scope to those with up to 50% non-residential use (currently 25%);
  4. Removal of restrictions on making subsequent claims (which extends to collective enfranchisement of flats, meaning competing groups of leaseholders could seek to acquire the freehold from one another indefinitely);
  5. Leaseholders will be given a choice over whether to acquire certain intermediate interests and their extent, subject to complex provisions (an apparent departure from the Government’s stated intention to make this “easier” for leaseholders);
  6. The ability for leaseholders to require that the freeholder takes a leaseback of certain units in the building (thus reducing the cost of enfranchisement). This extends to certain flats along with commercial leases;
  7. Abolition of marriage and hope value, reducing premiums for short leases in all cases and longer leases in enfranchisement claims;
  8. Capping of ground rents to 0.1% of the market value of the relevant freehold interest for the purposes of premium calculations with higher ground rents;
  9. A standard valuation method is to be used in all but limited cases;
  10. Landlord’s costs are only to be paid in limited circumstances (for example, where a claim does not proceed);
  11. The tribunal’s jurisdiction will be increased to save a leaseholder needing to apply to court to force their landlord to take action.

The Ability to “Buy Out” Ground Rent

The Government are currently consulting on the capping of existing ground rents for residential long leasehold properties in England and Wales (Government Consultation on capping existing ground rents (cms-lawnow.com)) including a proposal (among several suggested alternatives) to reduce all existing ground rents to a peppercorn. It is curious therefore that Government has included an ability in the Bill for leaseholders to “buy out” their ground rent; reducing it to a peppercorn in return for a premium, where they have more than 150 years unexpired on the term of their lease. The Leasehold Reform (Ground Rent) Act 2022 has put an end to ground rents for most new residential long leases in England and Wales.

Service Charges

Leaseholders of residential properties have had rights to challenge certain service charges for many years. This will however now be extended to fixed service charges and to owners of properties who pay a service charge where they own their freehold.

Additionally, Landlords will be required to supply more information in respect of service charges and insurance. Where they do not do so, the Tribunal may award damages of up to £5000 in favour of the service charge payer.

The Bill also implies terms in all leases, particularly as to the provision of information. Notably legal costs will not be recoverable pursuant to lease terms as a service charge or administration charge save for where the Landlord obtains an order from a Court or Tribunal. Leaseholders will also have the ability to apply for certain costs to be paid for by their Landlord even where leases do not permit them to do so.

Comment

Whilst some of the changes introduced by the Bill will not be controversial, the impact on mixed-use schemes (some of which were designed specifically to avoid enfranchisement and right to manage rights), along with the interference by Government with agreed lease terms will undoubtedly cause concern for freeholders and investors. There has been uncertainty in the market for some time, so at least  those parties  now have some clarity as to what the future holds.

The Bill may be further amended depending on the outcome of the ground rent consultation outlined above. The consultation closes on 21 December 2023 and Government has previously confirmed that the outcome of that will be incorporated into the Bill.

Additionally, the Bill did not provide (as was promised) a ban on the sale of new leasehold houses though this may be included in the Bill by way of amendment at a later date along with other proposed amendments, such as amendments to the Building Safety Act 2022 and an extension to those who must register with a redress scheme.