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Leasehold Reforms & Legislation Update

Background

The government has actively been considering options for changes to the leasehold system since 2017 and commissioned the Law Commission to report on the subject. In January 2020, the Law Commission reported in detail on options for a range of reforms which included possible changes to make it cheaper and easier to extend a lease or purchase a freehold. The Law Commission made a series of options and recommendations for the Government to consider as part of changes to proposed policy associated with the leasehold sector.

 

Latest Situation

The King’s speech on 7th November 2023 included the announcement of a forthcoming ‘Leasehold and Freehold Reform Bill’ with the aim of reforming the housing market and making it cheaper and easier for leaseholders to purchase their freehold and to protect the leaseholders from punitive service charge payments. In this guidance note we are only dealing with matters relating to lease extensions and the purchase of freeholds. The King’s Speech guidance notes issued when the speech was made included the following proposals to be included in the future legislation:

  • Lease extensions to be 990 years rather than 90 years.
  • The abolishment of the 2 year ownership rule meaning that leaseholders would not need to wait two years after purchase to undertake lease extensions.
  • A change in the limit of the amount of commercial use in mixed use buildings from 25% to 50%. This will mean the option to enfranchise or undertake Right to Manage will be extended to far more leaseholders.
  • A ban on the sale of leasehold houses (except in exceptional circumstances).
  • Make it easier and cheaper to purchase freeholds or extend leases.

The last point, which is the important one, was not covered in any detail. There was no statement that Marriage Value is to be abolished, however an example provided in the supporting documentation showed a lease extension premium falling significantly and the associated costs reducing. This infers that the legislation will either remove or reduce marriage value and may also remove or reduce freeholders’ recoverable costs.

There was also an announcement on a consultation upon lowering or capping Ground Rents as part of this new legislation. This consultation has already commenced and is ongoing until 21st December 2023. The consultation can be found at Modern leasehold: restricting ground rent for existing leases (www.gov.uk).

The full details will not be known until the draft bill is published. There is no date set for this other than it is to be included within the current parliamentary session which runs from now for the next 12 months until Autumn 2024. It is expected that the government will want to progress with the leasehold form in advance of the next general election and the draft bill is expected sooner rather than later, possibly before Christmas. Once the bill is published, it will have to go through the parliamentary process in the Houses of Commons and Lords. During this process, the contents of the bill can change dramatically with sections amended, deleted or even with new content added. Therefore, there is no certainty that the proposals outlined by the government will become part of any new law.

The new bill is expected to be lengthy and as such is likely to take a year or even longer to progress through parliament. Once it has passed through parliament the bill will receive Royal Assent and this will include a commencement date.

It should be noted that even after the bill is progressed, if it does not conclude before next election (latest possible date is 28th January 2025) the bill may never become law or could be significantly changed by the new government.

 

The Legislation So Far

The Leasehold Reform (Ground Rent) Act 2022 has been called the first part of the forthcoming legislation. Its provisions commenced on 30th June 2022 other than for retirement flats where the provisions will not come into force until at least 1st April 2023. It limits the ground rent payable under a new lease to a peppercorn (zero) per annum. There are different rules in place in respect of Replacement Leases (a replacement lease is the situation upon a voluntary lease extension) which allows the ground rent in an existing lease to continue providing it falls away to a peppercorn (i.e. zero) for any additional extended lease term.

Details of the Building Safety Act 2022 (BSA) are outside of the purpose of this information guide, but it has some relevant to leaseholders undertaking lease extensions both voluntary and statutory.

The BSA came into force on 1st April 2023. It introduces new duties for the management of fire and building safety in high rise residential buildings. One part of this legislation provides financial protections for leaseholders in buildings above 11 metres or 5 storeys with historical safety defects. More information can be found on the Leasehold Advisory Service website (www.lease-advice.org).

The relevance of this to leaseholders undertaking lease extensions is that for a leaseholder to qualify there are set requirements which include that a qualifying lease is a lease longer than 21 years granted before 14th February 2022. There are other requirements as well. At present, if a leaseholder with a qualifying lease undertakes a lease extension and has a new lease granted after 14th February 2022 then the new lease is not a qualifying lease and is outside of the BSA protections. This includes any statutory lease extensions granted after 14th February 2022. The government pledged to address this issue and the loophole has been closed in the Levelling-Up and Regeneration Act 2023 detailed below.

The Levelling-Up and Regeneration Act 2023 deals with the documented lease extension and BSA trap detailed above. This new legislation now means that a qualifying leaseholder will continue to benefit from the protections in the BSA if they extend their lease. This change is retrospective and meaning that all leaseholders who have completed lease extensions since 14th February 2022 will also be covered by the BSA protections. This legislation comes into force on 26th December 2023.

It is often useful to have an initial informal chat regarding your specific case. If you would like to talk to a member of the team on a strictly no-obligation basis, please feel free to call us on 01903 872211 and we will be very happy to offer you further advice.

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