The importance of the reforms put forward in the Leasehold and Freehold Reform Bill
By Katie Cohen
Katie Cohen shares her opinion on the scope of the leasehold and freehold reforms proposed by the UK government
The King’s Speech took place on 7 November 2023. The segment on the proposed leasehold reform Bill was disappointingly brief and vague. Since then, we have seen a flurry of activity; the King’s Speech briefing notes contained some strong indications of content, a draft Bill introduced on 27 November 2023 and, which at the time of writing, is passing through Parliament having had its second reading in the House of Commons on 11 December 2023 and an open consultation concerning the capping of ground rents which closes on 17 January 2024.
This is encouraging but, in my view, an attempt by the government to enact the less contentious elements of leasehold reform and a backing down on some of the more controversial reforms that have been mooted for many years. There is a marked absence of any reference to the abolition of leasehold in its entirety, marriage value, fixed calculators to streamline premium calculations and the introduction of commonhold as an alternative tenure of ownership.
Practitioners agree that reform is essential to make it cheaper and easier for existing leaseholders in houses and flats to extend their leases or buy their freehold. Increasing the standard lease extension term from 90 years to 990 years for both houses and flats, with ground rent reduced to £0 is not unwelcome. This will ensure that leaseholders can enjoy secure, ground rent free ownership of their properties for years to come, without the hassle and expense of future lease extensions. It will also correlate with the ability of participating leaseholders in a collective enfranchisement to regularise their ownership by extending their leases to 999 years post-completion. The difference between a premium payable for a 90-year lease extension and a 990-year lease extension is nominal. Indeed, many pragmatic freeholders are now granting 990-year lease extensions.
Removing the requirement for a new leaseholder to have owned their house or flat for two years before they can benefit from extending their leases has been an anomaly that is nonsensical. The consequence of this reform will enable leaseholders to exercise their right without a complex process during their conveyancing or waiting for two years from the point of registration at the Land Registry, which can be cumbersome as well as expensive. The two-year ownership rule has never sat comfortably alongside the absence of such a requirement for a participating leaseholder to acquire their share of freehold during a collective enfranchisement.
Increasing the 25 per cent ‘non- residential’ limit preventing leaseholders in buildings with a mixture of homes and other uses, such as shops and offices, from buying their freehold or taking over management of their buildings is widely encouraged. This will allow leaseholders in buildings with up to 50 per cent non- residential floorspace to buy their freehold or take over its management. The widening of this threshold brings collective enfranchisement and the Right to Manage in line with the same test used under the right of first refusal. I wholeheartedly support this reform.
The extension of the response date from 21 December 2023 to 17 January 2024 for the consultation on capping existing ground rents in my view serves to illustrate the widespread contentions surrounding this controversial proposal. As it stands, the government while seeking to ensure that all leaseholders are protected from making payments which in their view ‘require no service or benefit in return, have no requirement to be reasonable, and can cause issues when people want to sell their properties,’ are failing to balance the competing interests of freeholders, who rely on the income stream generated from ground rent. Further, the government have stated that they do not intend to compensate freeholders for any loss of ground rent.
This is, in my view, unfair, ill-considered and likely lead to unintended financial consequences for both freeholders and leaseholders. Subject to that consultation, the government will introduce a cap through the Bill. I expect a hotly contested and heated debate to ensue.
In conclusion, politically there has been doubt as to whether any of these reforms will be enacted in advance of the next General Election. Practitioners wait expectantly for any further developments on the emerging draft Bill, as well as any proposals resulting from the consultation on the capping of ground rents. I doubt that the Bill will pass through Parliament to such an extent to satisfy leaseholders, but reform, of sorts, is on the cards. The extent of that reform remains to be seen. Ensuring the ability of practitioners to effectively advise their clients for the foreseeable future, remains just as fraught with difficulty and uncertainty.
Katie Cohen is a partner specialising in leasehold enfranchisement at Keystone Law