Government finally amends the Building Safety Act 2022 to fix the "qualifying lease" extension loophole 

Having announced its intention to legislate in May 2023, amendments to deal with the issue were included at the last minute in the Levelling-Up and Regeneration Act 2023, which received Royal Assent on 26 October 2023.

Since coming into force last summer, the leaseholder protection provisions in the Building Safety Act 2022 and its associated secondary legislation have faced much criticism, particularly within the conveyancing industry. The complex procedures involving landlord's certificates and leaseholder deeds of certificate have caused much confusion and delay to sales of leasehold apartments in mid to high rise blocks.

But compounding the problems caused by such procedural complexity was an accidental error in the wording of the original legislation which meant that a leaseholder would lose the "qualifying status" of their lease simply if they extended it.

As discussed in previous articles, to be a qualifying lease (and therefore benefit from the vast majority of the leaseholder protection provisions), the lease must be a long lease under which the tenant is liable to pay a service charge and must have been granted before 14 February 2022. On 14 February 2022, the dwelling must also have been the then tenant's only or principal home, or the tenant must have owned no more than two other dwellings in the UK. 

However, when a leaseholder extends their lease either informally by agreement with the landlord, or through the exercise of statutory rights under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA), the effect is that the "old lease" is surrendered and then immediately replaced by the newly-granted "new lease" of the flat, to achieve the extension to the term. The date of the extended lease will therefore be after 14 February 2022 meaning that extended leases lost their "qualifying lease" status due to having been granted after that date (even if the "old lease" had been granted before that date and had been a qualifying lease).

Loss of qualifying status could then expose the leaseholder to substantial service charge costs for remediating building safety defects in the block, as well as prejudicing their ability to sell the flat.

Measures to correct the error

In May 2023, the government announced its intention to legislate to correct this unintended consequence "as soon as Parliamentary time allows". During the interim period, leaseholders and landlords were encouraged to take legal advice to ensure that the terms of any lease extension included contractual provisions which provided equivalent protections, as if those leases had not lost such qualifying status. 

But with no apparent progress being made on this issue for some months, the Government's hand appears to have been forced by some last-minute amendments to the Levelling-Up and Regeneration Bill, which had been working its way through Parliament since May 2022. This legislation introduces a variety of provisions to meet the Government's levelling-up "missions", including laws regarding planning, regeneration, compulsory purchase and local democracy.

In response, the Government proposed its own set of amendments to deal with the qualifying lease issue, and less than ten days later, the Bill was given Royal Assent on 26 October 2023. These amendments now provide new sections 119(3A) and 119A to the Building Safety Act 2022 to close the qualifying lease loophole by ensuring that "a connected replacement lease" will also be a qualifying lease.

Defining a "connected replacement lease"

To be a connected replacement lease, there must be a new lease of a single dwelling in a relevant building under which the tenant is required to pay a service charge, which was granted on or after 14 February 2022. This "new lease" must replace one other lease which is a qualifying lease, or two or more other leases at least one of which is a qualifying lease, and there must be continuity in the property let. 

A new lease "replaces" another lease if the term of the new lease begins during the term of the existing lease, where the new lease is granted in substitution of that existing lease, or if the term of the new lease begins at the end of the term of the existing lease (regardless of when the lease is granted). There is specific reference to lease extensions completed under the statutory rights granted by LRHUDA, but the new definition of connected replacement lease would also cover contractual lease extensions.

The requirement for "continuity in the property let" attracts another new definition. This requires the newly let property to be exactly the same as the already let property, consist of some or all of the property together with additional property (known as a "property combination") or consist of some but not all of the already-let property a ("property reduction"). There will also be continuity in the property let if a new lease is granted to rectify an error in a lease which the new lease replaces. 

Impact and comments

The amendments have retrospective effect and are treated as having come into force on 28 June 2022 (i.e. the date on which the leaseholder protection provisions under the Building Safety Act originally came into force). As a result, the benefit will be read into any leases that have already been extended during that period as if the loophole had never existed.

Hopefully, this will now settle lawyers and non-lawyers alike who had been cautious to ensure that adequate protection was included by way of contractual amendments to the lease extension documentation. The new definitions are not straight-forward, and will take some grappling with, but the amendments do appear to achieve their intended purpose: closing the lease extension loophole.