The Leasehold and Freehold Bill: what do the proposals mean?

The proposal for a Leasehold and Freehold Bill in the King’s Speech on 7 November 2023 demonstrates an ongoing and determined commitment by the government to reform the residential leasehold sector – and for leaseholders and freeholders, there are immediate questions and considerations.

While the provisions outlined in relation to the proposed Bill fall short of making it mandatory for all new flats to become freehold, there is clear evidence of a determined resolve to make real and lasting change in this area.

The fact that there is no promise of a ban on new leasehold flats will upset many who have been campaigning for this to be the case. This is because commonhold, the possible alternative to leasehold which has been on the statute books since 2002, is not yet ‘fit for purpose’. A lot more work needs to be done to the current version of commonhold and the government recognises this.

The plans that have been outlined so far suggest a number of changes that will be of significant interest to leaseholders looking to extend their leases or buy their freeholds, assuming of course that these proposals are in fact carried forward into law. For freeholders, there is less good news as it appears that the Bill would significantly impact the value of their assets. 

 What are the proposed changes?

The proposed changes announced have all been the subject of previous commentary or commitments given by the government since the White Paper ‘Fixing our Broken Housing Market’ (February 2017), and the subsequent consultation ‘Tackling Unfair Practices in the Leasehold Market’ (2017) and the government’s response to this. This process culminated in the Law Commission’s extensive review of the law relating to the areas of enfranchisement, commonhold and the right to manage in 2018, with its outcome reports in each area published in 2020.

A summary of the ‘headline news’ relating to the each of the proposed reforms as announced on 7 November 2023, and what these might mean for leaseholders, appears below:

Increasing the standard statutory lease extension term from 90 years to 990 years

This change will ensure that once extended, a lease will never need extending again under the statute.

Even if no other reforms are introduced to the valuation mechanism, the additional cost of making the lease this much longer will not be significant as the ‘expensive’ part of a lease extension relates to the part that is nearest the end of the lease term and the cost of extending beyond that diminishes in a non-linear, decreasing way.

This is a common-sense change and one that will avoid the need for statutory claims to be repeated where the original lease is short. Both freeholders and leaseholders are likely to find this a workable change, particularly as the proposals are very likely to retain the landlord’s redevelopment break rights, meaning that consistency of estate management will be preserved.

Removing the requirement for leaseholders to have owned their property for at least two years prior to extending

This change will be welcomed by all those engaged in the buying and selling process. Here, assignments of the claim will presumably still be possible, but the buyer will then have the option to wait two years prior to extending, if they so wish, provided that the lease terms are acceptable for mortgage purposes as at the date of the purchase.

This additional flexibility will benefit leaseholders having purchased a property, as they will not have to put up with a diminishing lease length for two years before being able to make a claim. Bearing in mind the delays at the Land Registry, and given that the leaseholder currently needs to have been the registered owner for two years to qualify, this will be a significant benefit.

However, this will not help anyone who needs to have a lease extended so that the extension is in place ‘as of completion’. In this sort of case, a deal will still have to be made with the freeholder directly.

Increasing the 25 per cent non-residential limit for mixed-use buildings to qualify for enfranchisement

There is a proposal to increase the qualification threshold so that buildings that are in mixed use will qualify, provided they are not more than 50 per cent non-residential.  Similar reforms are proposed in relation to the right to manage.

This will enable a larger number of buildings which currently do not fall within the enfranchisement legislation to exercise the right of collective enfranchisement. This may cause some consternation for investors/developers who have specifically either bought or designed buildings that are configured in this way.

There will be many more cases of mixed-use management and commercial tenants who may have to accept a residential residents’ management company (RMC) as their landlord. Currently, there is no detail as to whether any scheme of mandatory leasebacks might be proposed to reduce the cost in this sort of scenario. This was suggested in a Department for Levelling Up, Housing and Communities (DLUHC) consultation in January 2022.

Banning the creation of new leasehold houses

This honours a commitment made by way of a previous ministerial pledge by Sajid Javid when he was Housing Minister back in 2017.  No detail on the exact proposal exists at the moment, but it might be anticipated that this will only affect new builds.

There are other separate proposals in relation to service charges and transparency, which may also help all leaseholders.

Bringing estate management charges into the service charge legislation

This is good news for freehold owners on mixed estates as there is a commitment to bring ‘estate management charges’ under the remit of the service charge legislation. Currently, when estate management charges apply to freehold houses, these do not fall under the service charge legislation and cannot be challenged on grounds of reasonableness in a tribunal.

Valuation reforms – making it cheaper and easier to enfranchise or extend your lease

These are the proposed reforms that will be of most interest to anyone looking to enfranchise or extend their lease: the proposals to amend the valuation system, so as to affect what a leaseholder will have to pay to do this.

The short notes that accompany the King’s Speech are very light on detail on this, but the one key ministerial commitment which does appear is the promise to ‘make it cheaper and easier’ for those looking to collectively enfranchise, or to extend their lease. This phrase echoes the exact words used in the terms of reference given to the Law Commission and we now have some more detail on what may be proposed in relation to this.

Capping ground rent

Following the introduction of the Leasehold Reform (Ground Rent) Act 2022 it is now not possible to charge a ground rent in a new residential lease. On renewal of a lease on a voluntary basis, the ground rent may not exceed the current rent payable or be imposed after the end of what would have been the original lease term.

There is now a commitment to hold a consultation on capping the level of ground rent that can be charged under an existing long residential lease. This consultation was launched on 9 November 2023 and is open until 21 December 2023. Full details of the consultation can be found here.

The consultation sets out a range of options such as reducing all current ground rents to zero, freezing them at current levels, or setting a numerical threshold. The other option discussed is to cap them at a fraction of the value of the property.

It is impossible to predict which of these might be opted for by the government to take to parliament, but one thing that we can perhaps predict is that there could be fairly extensive scope for debate in parliament around these measures.

There might be the possibility of a challenge on human rights grounds if any change is too ‘extreme’ – however, this is very much just speculation at this stage. Freeholders may be less than impressed with these options – the best of which (for them) is to cap ground rents at a fraction of market value.

What would the effect of capping ground rent be?

If the intention is to limit the level of ground rent that can be charged, this will benefit leaseholders on two fronts.  

Firstly, the leaseholder will have a lower medium- to long-term expenditure on ground rent in the lifetime of the lease, and those with excessive or doubling ground rents will have an automatic solution to their problem.  

Secondly, if a cap is introduced and this also follows through into the valuation mechanism, then it will reduce the amount to be paid on enfranchisement as the ground rent must be ‘bought out’ when buying the freehold or extending the lease.

Conversely, freeholders will see both a reduction in ground rent income and also an impact on the capital value of their assets.

A potentially bigger change – removing marriage value from the calculation

Currently, where a lease has less than 80 years to run, the leaseholder must pay an additional piece of compensation called ‘marriage value’.

Reading between the lines in the notes that accompany the King’s Speech, it is clear the government has made a commitment to the removal of marriage value from the lease extension and enfranchisement calculation.  

However, what is not at all clear is how this will be done or indeed when. While there is a suggestion that such an amendment can perhaps be inferred, it is not clear whether this would be part of the same Bill. The choices around valuation reform are political and will need to be debated by parliament.  

There is also the possibility of a Human Rights Act challenge, which could happen if any changes are deemed to be disproportionate.  

At this stage we do not yet have any information as to whether there will be a challenge of this sort as the proposals themselves are not laid out in such a way as to be able to be fully understood or appreciated in any detail.

What does all this mean in practice?

A lot of the above is potentially good news for leaseholders as they will find it easier to exercise their rights in the future once this legislation is enacted, assuming of course that it is. Freeholders will want to see what the results of the consultation will bring, and also consider the further detail – when it emerges – around the proposed removal of marriage value from the calculation.

The key question at this stage is when any such reforms might be introduced and also, what the detail of the proposals, including the proposed valuation reforms, will be.

Is there a possibility of the Bill being “bogged down” and/or the government becoming embroiled in litigation, while some or all of their decisions or proposals are subject to legal review? At this stage we simply cannot say. To comment further we need a draft Bill.

How soon could all this become law?

The first thing to say is that just because a Bill has been proposed, it does not necessarily mean that it will be enacted in these exact terms. However, assuming that a draft Bill is produced and put before parliament during this session of parliament, it is possible that an initial piece of legislation could make it towards the statute books within a year to eighteen months.

As mentioned above, the prospect of wider reform – including valuation reform – is potentially something that may take a lot longer. For this reason, it is possible that the more ‘straightforward’ elements – such as making lease extensions 990 years long, removing the two-year rule and changing the threshold for qualification, could become law sooner, but it very much is a matter of guesswork at this stage.

As ever, therefore, specific advice will be required in each individual’s case as to whether to proceed and what the right thing to do will be. The one point of certainty is that if a property is currently unmortgageable, or unsaleable because of lease length or other issues, then the only course of action that will remedy this is to take action under the existing legislation. The other unknown factor is the possible timing of any general election although it is worth noting that all of the major parties appear to be committed to a programme of reform in this area.

For the moment then it seems that the answer to the question of what to do next, is to carefully consider your individual position and to take expert advice, as this will very much depend on the specifics of any given situation.

Mark Chick is a senior partner at Bishop & Sewell LLP
bishopandsewell.co.uk

This note has been prepared based on the information available at the time of writing and is not a substitute for legal advice. Advice in relation to any particular matter or set of facts will need to be considered on a case by case basis.