The forthcoming King’s Speech on 7 November is highly anticipated by all those involved in the leasehold sector. The first phase of reforms have ushered in a number of changes to help leaseholders in the wake of the ground rents and leasehold houses scandals, with the Government having committed to make buying a freehold or extending a lease “easier, faster, fairer and cheaper”. As we now look ahead to what the second phase of reforms might entail, a wide range of possible changes have been mooted.
The state we’re in
On 7 January 2021 the Government announced legislation would be introduced to set future ground rents to zero. The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022 and applies to new lease agreements created on or after that date.
The Act put an end to ground rents for most new long residential leasehold properties in England and Wales. The Act came into force for most new leases on 30 June 2022 and from 1 April 2023 for leases of retirement homes. I.e. From 30 June 2022, landlords of regulated leases must not require a leaseholder to make a payment of prohibited rent.
The state to come (possibly)?
The Government has made numerous statements since the Law Commission published its reports in July 2020, which give some strong cues as to the likely direction of travel for leasehold reform. A ministerial statement by then Housing secretary Robert Jenrick in January 2021 briefly set of the desired scope for the second phase, including changes to valuation, a cap on ground rents, and potential abolition of marriage value.
It seems likely therefore that the next round of reforms will predominantly focus on two things; increasing and improving take up rights and making some simple adjustments to make it ‘cheaper and easier’ to enfranchise, including changes to the valuation method.
What we now have by way of ‘news’ is a very informative article published in the Sunday Times on 29th October 2023 and backed up by several other media sources, indicating what the scope of the first phase of the reforms might be.
One suggestion was that the threshold for RTM claims might be changed so that the right to manage would apply to a building where more than 25% is used for non-residential purposes. There has been discussion about raising the threshold to 50%. It now seems that this may be on the cards.
That then begs the question – although not mentioned in the pre-King’s Speech ‘release’ of information – as to whether the government might also be proposing to reform the 25% rule for collective enfranchisement. Currently, if more than 25% of the internal floor area of the building, excluding any common parts, is neither used or intended to be used for residential purposes then the building will not qualify. By increasing this threshold to 50%, with mandatory leasebacks included, it will enable ‘many more people to enfranchise.’ There was a previous consultation on this by DLUHC and therefore this could also be ‘on the cards.’
If this were to be done then it would certainly improve access to enfranchisement and also make it ‘cheaper and easier.’
I would also expect the promise of a ‘short amendment’ to ensure that statutory lease extensions are to be for 990-year terms, with the attendant amendments to the valuation and other schedules that this will require. This could be dealt with in ‘isolation’ and would deliver on a previous ministerial promise. It would also be an easy change to make – thereby avoiding the need to extend ever again.
Increasing the statutory lease extension to 990-years would ensure no need to repeat the exercise for ‘shorter’ leases where (absent a reform on the commencement of marriage value at 80 years) there may be a need to extend again in the next few years in circumstances where a lease was renewed on a voluntary basis for 99 or 125 years. In valuation terms the difference in price will not be at all significant and this would be a big practical help to leaseholders.
The second proposed change that I think we will see some movement on will be to deliver in some way on the commitment to ‘abolish marriage value’. The recent article in the Sunday Times (29 October 2023) stated that ‘ministers will now legislate to remove marriage value’ so that people with toxic ground rents can re-mortgage or sell their properties. This is the ‘big ticket item’ and the one thing that would change things significantly for leases that are under 80 years.
However, I do not feel that this is likely to be proposed in isolation because of the inherent risk of a lack of balance if other valuation reforms are not introduced at the same time. This is also potentially vulnerable to a Human Rights Act challenge, as freeholders will not be enthused by reforms to the valuation system that will reduce the value of their assets. The context of all the valuation changes will have to be looked at carefully once the nature and scope of these are known.
There is also the promise of a consultation on capping ground rents and whilst there is no detail as of yet, that begs the question that if ground rents are to be capped at a fraction of market value, then what will the knock-on effect into valuation be? Most likely this will clearly reduce compensation quite significantly if the actual rent collectable is used rather than any rent written into the lease, particularly where this is escalating or outstrips whatever cap is to be imposed.
The general thinking has been that the reforms on valuation would be better set in the context of a much wider and broader reforming piece of legislation, but it may be that this is exactly what the Government has planned.
Therefore, it is possible we will see a manifesto commitment to reform the law on valuation so as to abolish marriage value as part of a wider package of valuation reform. We might see a ‘Valuation Reform Council’ set up – a bit like the Commonhold Council – also most likely packed with representatives that strongly support a pro-change agenda. My feeling is that this could be announced so as to come into effect before the next election.
My prediction is that wider valuation reform and ‘reform’ more generally would come further down the line. There might also be a manifesto commitment to introduce a ‘grand reform bill’ ‘abolishing’ leasehold during the next parliament. However, there are massive issues thrown up by the scale of what would be involved in wholesale reform, which would be the ‘best’ and most comprehensive solution. Any reforming act would be an enormous undertaking and would take up a large tract of parliamentary time.
What the detail of any potential abolition legislation might be would of course ‘remain to be seen’ and mandating Commonhold would almost certainly be part of this. That would mean ensuring that Commonhold is ‘fit for purpose’ and therefore also accelerating the programme of work around this.
Replacing the existing system with something totally new overnight isn’t legally or physically possible. Instead, it is more likely the Government would set a ‘sunset clause’ for all new leaseholds, but only once Commonhold has been made fit for purpose. When might that be? Well, that all depends on when Commonhold is made fit for purpose – and that, in my estimation, is three to five years away at the earliest.
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The above is accurate as at 03 November 2023. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.