The Leasehold and Freehold Reform Bill was introduced to Parliament on 27 November 2023. This significant piece of legislation aims to reform the leasehold sector and make good on the Government’s commitment to make it ‘easier, faster, fairer and cheaper’ for leaseholders to extend their lease or purchase the freehold to their property.
The Bill is the second phase of the Government’s plans, following on from the Leasehold Reform (Ground Rent) Act 2022, which outlawed ground rents for new, qualifying residential leasehold properties in England and Wales. The Government says the Bill will “make the long-term and necessary changes to improve homeownership for millions of leaseholders in England and Wales” with Levelling Up Secretary, Michael Gove, stating he is confident that legislation will be passed before the next General Election. The Bill received its second reading on 11th December and now moves to the Committee stage. The swift progress to date shows the pace which Government wants to attach to these proposed reforms.
This landmark Bill proposes a series of changes that could have far-reaching implications for leaseholders, freeholders, and the wider property and financial markets. Some of the key changes proposed in the Bill are outlined below:
Removal of Marriage Value
Perhaps the most significant change is the proposed reform to valuation to eliminate ‘marriage value’ from lease extension and enfranchisement premium calculations. This is a significant change, as it would considerably reduce the cost of extending a lease with fewer than 80 years remaining, effectively providing the owners of short lease properties with a one-off windfall when they come to next extend the lease.
Other valuation changes
The Bill proposes a new valuation method which will relate to ‘market value’ of the freeholder’s interest and will use a ‘term and reversion’ calculation. In addition, the value of any ground rent payable is likely to be capped at 0.1% of capital value when calculating the compensation, thereby further reducing the premium payable. The relevant capitalisation rate for working out the value of the reversion will be prescribed and at this stage there is no indication of what this is likely to be. Given the direction of travel, it is not likely to be a figure that results in higher premiums than is the case at the moment.
Longer lease terms
The standard lease extension term for both flats and houses is proposed to increase to 999 years, from 90 years for flats and 50 years for houses. This change will provide long-term security for leaseholders. Furthermore, the Bill proposes an end to the two-year ownership requirement, which will allow leaseholders to extend their lease immediately upon taking ownership of the property.
The Bill proposes that when a leaseholder extends a lease or buys their freehold that the freeholder will not be able to recover their costs from the leaseholder. There is a proposed ‘floor’ figure so that if the premium is low and the costs are ‘reasonable,’ in certain circumstances, the flat owner may have to pay something towards the freeholder’s costs.
The Bill also proposes sweeping changes to the property management sector. In addition to ‘banning’ insurance commission (instead a charge for placing the cover can be levied), the Bill also seeks to introduce standardised and transparent service charge reporting. It will also require managers to publish a schedule of administration charges in order to be able to recover them. Additionally, in a ‘reversal of fortune’ under the Bill, a freeholder pursuing arrears or involved in a service charge action with its leaseholders will have to apply to the tribunal for leave for its legal and other costs to be added to the service charge budget.
The Bill proposes that ground rent will be reduced to peppercorn (i.e. £0) upon payment of a premium, and proposes that leaseholders who have had very long leases will gain a new right to buy out their ground rent without extending the lease or purchasing their freehold.
The Government is further consulting on whether to introduce a cap on ground rents for all existing leases through primary legislation. This consultation has been extended and is now due to close on 17 January 2024.
Banning New Leasehold Houses – missing from the Bill
The Government has made repeated ministerial promises to ban the creation of new leasehold houses. Whilst the impact of the Leasehold Reform (Ground Rent) Act 2022 and the interaction the CMA with housebuilders has addressed this issue to some extent, the Government was embarrassed to note that provisions dealing with this were not included in the draft Bill. There has been a promise to look at amending the Bill to deal with this as it progresses, although, as it stands at the moment, there is no ban on new leasehold houses.
Changes to the ‘Non-Residential’ Limit
The proposed legislation seeks to increase the ‘non-residential’ limit from 25% to 50%, thereby enabling leaseholders in buildings with up to 50% non-residential floorspace, such as retail and offices, to buy their freehold or take over its management. This is going to allow many more buildings to come within scope and similar changes are proposed in relation to the Right to Manage.
The Bill also proposes a number of changes that will make it ‘cheaper and easier’ to collectively enfranchise. In the ‘new world’ in a collective, those buying the freehold will be able to mandate that the freeholder takes leasebacks over any non-participating flats, thereby reducing the price payable. Similar provisions will apply to areas that are not subject to a long lease (such as commercial premises) meaning that in a case where there is significant value attaching to these areas that this does not need to be found by the collective as this value will stay with the freeholder.
Building Safety Act 2022
The Bill also seeks to build on the legislation brought forward by the Building Safety Act 2022, by making freeholders liable to pay for building remediation work, thus further protecting leaseholders by ensuring charges for such work cannot be passed on via the service charge.
The Leasehold and Freehold Reform Bill represents a major change to property law, with implications for Leaseholders and Freeholders.
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The above is accurate as at 14 December 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.