Removal of the two-year qualification period is welcomed as a sensible step forward by Association of Leasehold Enfranchisement Practitioners (ALEP) member and Russell-Cooke partner, Shabnam Ali-Khan.
All too often commentary on emerging legislation focuses on the more controversial changes – and quite rightly so. But the risk is that other significant changes are overlooked. Consequently interested parties, unaware of the proposed changes, do not make the representations to their MPs as the democratic system allows, and relatively minor aspects of legislation do not benefit from scrutiny.
The Leasehold and Freehold Reform Bill, which is currently working its way through Parliament at speed, proposes to allow leaseholders to extend the lease of their flat immediately upon acquisition – a change to the two-year waiting period (as mandated by the Leasehold Reform Housing and Urban Development Act 1993). The scrapping of the two-year ownership requirement will also apply to houses, meaning leaseholders will have rights to extend their lease or acquire the freehold of their house straight away.
This is one of the lesser-know aspects of the Bill – which includes proposals to increase the standard lease extension term for houses and flats to 990-years and to remove ‘marriage value’, both of which have tended to gain more attention.
But the issue of the two-year qualification period will have an impact on certain areas of market and therefore should not be overlooked.
If we focus on the rights for leaseholders of flats to extend their leases (which is most common), the current position is that a leaseholder must be the registered proprietor at the Land Registry for at least two years before the right to extend can be exercised. Currently the right allows a leaseholder to serve a Section 42 Notice, which refers to the relevant section of the Leasehold Reform, Housing and Urban Development Act 1993. This is a formal request from a leaseholder to the freeholder or landlord (or both) and any other appropriate party. It provides a leaseholder with an extension of 90 years on top of the remaining lease term and a ground rent reduced to a peppercorn .
The removal of the two year ownership as laid out in the current Leasehold and Freehold Reform Bill will remove the need at the time of purchase for both vendors and purchasers to be concerned about the assignments of the Section 42 notice during purchase. Currently a seller, provided they qualify, can serve a Section 42 notice and assign the benefit of the claim to a buyer upon completion. This allows the buyer to continue the process without having to wait two years. This alleviates the potential risk of conveyancers with no experience in this field delving into this area and the purchasers becoming unstuck further down the line, should they have hoped to continue the lease extension process following completion of their purchase. More specifically, it removes the potential for mistakes in this part of the process – such as invalid assignments, late assignments and inadequate authority to sign a claim notice.
It is widely believed that having a two year ownership requirement currently is an unnecessary hoop to jump through and its motives are unclear – why two years; why any time at all?
So this aspect of the legislation is good news for those who purchase a property with a short lease. We expect investors in particular to see this as an opportunity – acquiring a property with a short lease can be a liability in the two years which must expire before a lease can be extended. Following this change, this becomes a risk worth taking – especially for those who purchase a property before
the legislation takes effect (thus benefiting from a lower purchase price) and can extend the lease when it does.
One potential consequence is that we may see more ‘flipping’ of properties as those with short leases will be easier to sell and owners who may have previously waited two years before selling will no longer need to do so.
While there’s no doubt this change will be received by homeowners and potential homeowners, the industry too is generally in support of this element of the legislation. Almost 80% of lawyers and property professionals support leasehold reform and more specifically, 95% support this aspect of the reform. These figures are the result of research by the Association of Leasehold Enfranchisement Practitioners (ALEP) of which I am a member.
ALEP is a professional body representing over 1,200 solicitors, barristers and surveyors who work in leasehold enfranchisement and has been instrumental in influencing leasehold reform to date. At ALEP’s annual conference last autumn, members were asked ‘In general, is the leasehold system in need of reform?’ to which 77.37% responded ‘yes’; 21.17% said ‘no’, and only 1.46% had no opinion.
Following the publication of the Bill, members were asked to provide your views and opinions on the proposal to remove the requirement for a new leaseholder to have owned their house or flat for two years before they can benefit from these changes. On this specific aspect, 95% stated that they supported the initiative, whereas just 5% was negative.
Members’ comments were entirely positive, reflecting on the benefit to the property market at large. One member said, ‘This is a sensible step to simplify the process and speed up leasehold sales’. Another reiterated this statement and referred to it potentially closing a loophole: ‘Simple and sensible – the existing two year rule is simple to circumvent by assigning a notice to the purchaser, so we may as well do away with that step’. This view was endorsed by another ALEP member, who said, ‘Currently at two years is not causing an issue as vendors can serve the notice and assign to a new purchaser’.
Both as a lawyer and as a member of ALEP I have always supported leasehold reform – to an extent. While the debate rages on over ground rents and the standard lease extension term, this is an element of the Bill which I hope to see enacted soon.
