The King's Speech – Leasehold reform comes to fruition
The announcement of a Leasehold and Freehold Bill in the King's Speech has kickstarted a number of long-awaited leasehold reforms, many of which have been on the Government's agenda since 2019. Whilst the reforms have taken a large step back from Michael Gove's stated intention to abolish the leasehold system, they do signpost a moving of boundaries that could lead to the phasing out of traditional leasehold.
The reforms include, as expected:
- New build houses must be sold as freehold (other than in exceptional circumstances);
- The statutory right to a lease extension will be increased from 90 years to 990 years;
- The lease extension qualification requirement of more than two years ownership will be removed; and
- Collective Enfranchisement and The Right to Manage will be extended to apply to more buildings by increasing the non-residential floor space restriction from 25% to 50%, allowing more groups of leaseholders to take over management or buy the freehold.
These reforms will see the traditional third-party landlord have less incentive to retain a stake and presence in leasehold property structures.
What is more controversial and less clear are the reforms going to value, such as:
- Making it 'significantly' cheaper for leaseholders to extend their leases or buy their freehold; and
- The proposal to consult on capping existing ground rents to a peppercorn (nil), being a current income stream for many landlords, pension funds and investment schemes.
The elements of reform affecting value seek to address the Government's objective of making lease extensions and buying freeholds cheaper for leaseholders. However, the actual detail of how this will be achieved has not yet been provided. No confirmation as to the abolition of marriage value has been stated, only an example provided where a leaseholder is extending a 76-year lease; it would cost £10,000 less under the reforms. This points to marriage value being abolished or amended but it is not confirmed.
The consultation on capping existing ground rents raises the prospect of landlords' income streams being radically reduced, which will raise the question of whether compensation would need to be paid to such landlords for what would be in effect the expropriation of the landlord's existing right to be paid a rent.
Consumer rights for leaseholders
The second key focus of the reforms is the introduction of additional consumer rights for leaseholders, including:
- Setting maximum timescales and fees for the provision by landlords of information to enable sales to proceed (usually by way of leasehold property enquiry forms, known as LPE1 forms);
- Introducing a standardised format of service charge demands and accounts to improve transparency of costs information;
- Replacing buildings insurance commissions with transparent administration fees;
- Removing landlords' ability to recover legal costs from their leaseholders who challenge poor practice (which we anticipate means in First-tier Tribunal proceedings);
- Giving freehold homeowners the ability to challenge estate service charges at the First-tier Tribunal;
- Extending access to redress schemes for leaseholders, by requiring more freeholders to belong to them; and
- Introducing additional protections for leaseholders to ensure that the Building Safety Act 2022 "operates as intended".
There is much that remains to be seen in terms of the details of each of these proposals, but the general thrust is a tilting of the balance in favour of leaseholders in a number of areas that are the subject of common complaints of unfairness regarding costs and lack of transparency.
As to what is not included, the Government has as expected stopped short of the root and branch reform of enfranchisement proposed by the Law Commission. The proposals also do not contain any reference to extending commonhold, either on new or existing schemes.
Nevertheless, whilst many of the proposed reforms have been in circulation for several years (for example the standardised form of service charge accounts has been on the statute books but left unimplemented since the Housing and Regeneration Act 2008), the scale of these reforms means that landlords and managing agents will in due course need to make substantial changes of practice.
All parties have been waiting for something solid on leasehold reform for the past few years. Whilst the detail of the Bill is awaited, the proposals indicate a significant evolution of the leasehold system and there is likely to be a hive of activity in preparation for the passage of the Bill through Parliament. A key question of timing will be whether the Government pushes through the Leasehold and Freehold Bill so that it reaches the statute books before a General Election is held some time next year. If not, there will remain a significant degree of uncertainty as to what any final reforms will look like, given how political the issue of leasehold reform has become in recent years.