Written by Lucy Walsh, partner at Shoosmiths
Leasehold reform had been a consistent promise of the Conservative government with its 2019 manifesto promising to reform the leasehold system. It is perhaps somewhat disappointing that those commitments were not addressed until the final days of the Conservative government.
On 24 May 2024, the Leasehold and Freehold Reform Act 2024 (LAFRA) was rushed through parliament in the Government’s wash-up period.
The purpose behind reforms was to give leaseholders more rights and protections over leasehold interests and redress perceived inequities which exist in favour of freeholders.
In November 2024, Labour’s Housing Minister, Matthew Pennycook went some way to defraying those concerns in a statement to the House of Commons In that statement, he voiced Labour’s ambitions to significantly overhaul what he referred to as ‘a feudal leasehold system’ and was quick to point out that whilst LAFRA went some way to reforming the leasehold system, it did not go far enough.
To date, the majority of the provisions contained in LAFRA remain unimplemented and secondary legislation is necessary to bring those provisions into force. Mr Pennycook has identified ‘serious flaws’ in the drafting of LAFRA (in particular the proposed reforms to valuation principles) which will require the passing of primary legislation to fix, and whilst it intends to work at pace wants to ensure that any reforms it makes are ‘fit for purpose.’ .
Leasehold and Freehold Reform Act 2024
In terms of LAFRA’s implementation, the Government has indicated that the current requirement for a leaseholder to have owned a property for two-years before being able to claim a lease extension will be abolished in January 2025 and measures which make exercising the right to manage easier and cheaper for leaseholders will be brought into force in Spring 2025. There is also a firm intention to make it easier and cheaper for leaseholders to challenge service charge costs and legal costs with an intention to consult on these changes in early 2025.
What is less clear is the Government’s timetable for implementing the proposed changes to the valuation methods adopted in lease extension and enfranchisement claims. The proposed changes to the valuation methods will see:
· valuation principles being standardised and being applied consistently to houses and flats,
· the abolition of marriage value payable to landlords
· for valuation purposes only, capping round rent at of 0.1% of market value when calculating premiums,
· deferment and capitalisation rates used in the valuation process will be set centrally by the Secretary of State
Mr Pennycook advised that the Government intends to consult on the proposed valuation rates in Summer 2025 but thereafter secondary legislation will need to be passed to set out the detail and primary legislation passed to fix the existing flaws. All of this points to a lengthy period of time elapsing before we have any certainty on valuation principles.
This timetable is complicated further by seven sets of judicial review proceedings issued against the Government which challenge LAFRA on the basis it is incompatible with Article 1 of the European Convention on Human Rights. It is argued that LAFRA seeks to deprive property owners of their property and even though not in force, the proposals are, according to many landlords, already having a detrimental impact on portfolio values.
The Government had sought to stay proceedings pending the implementation of the secondary legislation which would prescribe capitalisation and deferment rates and therefore enable a more accurate determination to be made of any losses suffered by parties. The court declined to stay matters noting that it could take months, if not years, for secondary legislation to be passed. The Government has the unenviable challenge of seeking to balance the interests of leaseholders and freeholders – the prospect of the compensations claims it will face if the proposals are implemented must weigh on its mind when considering how far to push matters. For the foreseeable future, uncertainty on valuation principles looks certain to remain.
Leasehold and Commonhold Reform Bill
Labour’s proposals and commitments to overhauling the leasehold system do go much further than the previous governments. It seeks to:
· ban the creation of leasehold flats
· make commonhold the default tenure by the end of this parliament
· consider converting existing leasehold interests to commonhold interests
· remove forfeiture as a way of enforcing lease covenants
· strengthen regulation of agents.
The Government’s intention is to publish a White Paper on commonhold early this year with the Leasehold and Commonhold Reform Bill expected in the second half of 2025.
Those who operate in the leasehold arena will no doubt wonder whether such assertions carry merit given the relatively minor inroads commonhold has made since the Commonhold and Leasehold Reform Act 2002 to date. All evidence points to the commonhold model not having taken off and in that way providing effective property ownership and management solutions sought by such reform is likely to be challenging.
