Following on from the announcement of leasehold reform in the inaugural King’s Speech, on Monday 27 November 2023 the government published the much anticipated Leasehold and Freehold Reform Bill, intended to empower leaseholders, reduce their costs and improve consumer rights. We summarise the key aspects of the Bill below.
Lease extensions and enfranchisement
The Bill introduces anticipated provisions overhauling the lease extension process, including the removal of the need for a qualifying period of two years’ ownership as well as increasing the lease extension term to 990 years.
Most significantly, the valuation regime is being heavily reformed to make it cheaper for leaseholders. The new statutory formula will remain within the domain of specialist enfranchisement valuers but marriage value and hope value are being removed, which will significantly reduce premiums where the lease has less than 80 years to run. This loss of value will be compounded for landlords who will not be able to recover their costs of the transaction from the tenant (apart from in limited circumstances) as they can under the current law.
There is a degree of additional complexity introduced by the Bill, for example the reforms allow for the division of intermediate titles for acquisition by the leaseholders, which could result in a patchwork of headlease ownership across the building. This could create practical management issues for the building, the implications of which will need to be carefully worked through.
As to which buildings will qualify for statutory rights, the Bill changes the non-residential threshold for collective enfranchisement and the right to manage from a 25% to 50% non-residential cap, meaning that a broader category of mixed tenure schemes will qualify for such rights.
Service charge transparency
Perhaps the most surprising aspect of the Bill is the extension of the existing law and regulation of service charges, which will significantly tip the balance of power towards tenants. These changes include the following:
- Fixed service charges will be subjected to a limited form of regulation, including a specified form of service charge demand and the requirement to provide an annual report
- Variable service charge accounts will need to be in a standard format, designed to make the costs easier to understand and easier to challenge
- Tenants will be entitled to require the landlord to provide information relating to service charges, backed with Tribunal enforcement powers
- Insurance commissions will be banned from inclusion within the service charge
- Landlords will not be entitled to pass on the litigation costs of Court or Tribunal proceedings to leaseholders via the service charge unless the Court or Tribunal determines that it is just and equitable to do so, even if the lease provides for the recovery of such costs
- Tenants will be given the equivalent right to claim their litigation costs from the landlord if the Tribunal considers it just and equitable to do so
Regulation of estate management charges
A substantial part of the Bill is dedicated to introducing much greater regulation of estate management charges, so that freehold owners will have broadly the same rights as tenants who pay a service charge. These will include the right for freeholders to challenge the reasonableness of charges or services provided, the inclusion of transparency and annual reporting obligations, and similar restrictions on administration charges.
Most notably, as presently drafted the estate management charge provisions do not appear to distinguish between fixed or variable charges, meaning that freehold estate owners who demand a fixed service charge will be subjected to significant new administrative burdens and the potential risk of non-recovery.
Further ground rent reforms
As it stands, the Bill introduces a new procedure whereby leaseholders with more than 150 years remaining on their term will have the right to effectively buy out their annual ground rent, replacing it with a peppercorn (nil) rent. The premium payable for this will reflect the capital value of the landlord's right to receive a ground rent for the remainder of the lease.
Additionally, the Government is consulting on further options to cap ground rents, which could result in all existing ground rents being capped at a peppercorn, a maximum value or percentage of property value, the original contractual ground rent before review, or simply freezing ground rents at current levels. The consultation is due to close on 21 December 2023 and the Government intends to implement the outcome of that consultation by way of amendments to the Bill as it passes through Parliament.
Leasehold house ban – a mysterious omission
In a further unexpected twist, the Government's previously announced ban on the sale of leasehold houses was not included when the Bill was published. The Government has stated that it will be introduced via amendments to the Bill, but with rising political pressure to abolish leasehold entirely it remains to be seen whether this omission will result in even more fundamental reforms being introduced to the Bill.
Irrespective of whether the Government bows to political pressure to abolish leasehold entirely, the reforms contained in the Bill nevertheless represent a significant shifting of the balance in favour of leaseholders. The introduction of fixed service charge regulation and the likely ban on new leasehold houses could have a particularly heavy impact on the social housing and retirement living sectors in particular.
A key consideration that seems to be in danger of being entirely overlooked is that if the reforms lead to an increase in leaseholder-owned landlord companies with no capital assets, the cost of any dispute could push those landlords into insolvency. This would result in an increased risk of poorly maintained blocks falling into disrepair, with a reduction in value of the flats that are owned by the leaseholders that the legislation is intended to protect.
In its press release, the Government has stressed that further measures will be introduced as the Bill makes its way through Parliament, including amendments to the Building Safety Act 2022 to further protect leaseholders. The true extent of the legislative shake-up therefore remains to be fully seen, but the current direction of travel suggests that leasehold will represent a very different form of investment once the reforms have been implemented.