Witten by Shabnam Ali-Khan – Partner, Russell-Cooke
Nothing stands still in the world of leasehold enfranchisement at the moment. Following the rushed Royal Assent of the Leasehold and Freehold Reform Act 2024, more legislation is on its way. In the King’s Speech on 17 July, a new Leasehold and Commonhold Reform Bill was announced, but the full details of the Bill have yet to be released. We can expect more information on this in the near future but in the meantime the guidance simply highlights five objectives of the Bill.
1. Enact remaining Law Commission recommendations to strengthen leaseholders’ rights to extend their lease, buy their freehold, and take over management of their building.
The 2024 Act addresses most of the Law Commission’s recommendations on lease extensions and freehold purchases: a 990-year lease to replace the current 90 years lease; removal of the two-year ownership requirement for flat lease extensions; extending the right to acquire freeholds; giving landlords responsibility for their own costs in most circumstances introducing prescribed rates for premiums, and eliminating marriage value for leases under 80 years.
So, what remains for the new Bill to address? And, bearing in mind that none of the leasehold reform sections of the Act which gained Royal Assent in June are currently in force, could these provisions be revised?
Given the backlash from landlords over the removal of marriage value, it is likely that this will be revisited, along with the other valuation provisions. The human rights challenge mounted by Annington Properties in September may have prompted Labour to take another look at this. The Bill may outline provisions for an online calculator to assist parties in calculation of premiums, although this would hinge on whether the rates mentioned previously are prescribed. Currently the notices leaseholders and landlords must serve in relation to flats are not prescribed and the Bill may provide an opportunity to consider this.
2. Reinvigorate the commonhold tenure
Commonhold was introduced in 2002 as a way of enabling the freehold ownership of flats and avoiding the shortcomings of leasehold ownership. However, fewer than 20 commonhold developments have been established since. The Law Commission put forward proposals for improving commonhold in 2020 and the government intends to consult on options to restrict the sale of new leasehold flats so commonhold becomes the default tenure.
The 2024 Act did not address commonhold, but it will form an important part of the new Bill. We hope to see some clear guidelines and provisions which make the process easier for leaseholders. Currently a building needs 100% agreement of its leaseholders to convert to commonhold and this may be reduced under the new Bill. However, if leaseholders are to be forced to be part of a commonhold arrangement, the Bill will need to improve lenders’ confidence in this form of ownership as well as providing owners with greater input in the process and how commonholds are run. Whether a ban on new leasehold flats will be introduced remains to be seen.
3. Regulate ground rents for existing leaseholders.
The previous government’s promise to cap ground rents is yet to materialise and yet the ground rent scandal highlighted the onerous ground rents many leaseholders were facing with escalating, unaffordable rents making it difficult to sell or remortgage. It is expected that the Bill will introduce caps to ground rent and potentially ban certain practices for new leases.
4. Strengthen the rights of freehold homeowners on private or mixed-tenure residential estates.
The new Bill will aim to provide better protection for freehold homeowners against unfair charges and greater rights to challenge and more transparency. It has said it will consult on this to ensure freehold homeowners are better protected.
5. Remove the threat of forfeiture as a means of ensuring compliance with a lease agreement.
This means leaseholders will not risk losing their homes for breaching their lease agreements. Instead, the government plans to introduce fairer ways to resolve disputes and ensure compliance without such severe consequences. However, it is crucial this is balanced with protection for landlords against those leaseholders who persistently are in breach of their leases.
So, given these five likely changes (but no certainty and no timeframe), how should leaseholders respond to the current situation? I’d recommend that leaseholders weigh up their options carefully and consider the commercial picture (for example if you are in the process of selling a flat and a short lease is causing difficulties in doing so, it may be preferable to bite the bullet and extend now), seek valuation advice which takes into account the various scenarios, and try to keep up to date with change and potential change as much as possible.
