Leasehold Reform Explained

Numerous leaseholders eagerly await the anticipated leasehold reform, optimistic that it will enhance their lease-related circumstances. This comprehensive article serves as a valuable resource, providing the latest updates on every significant development. We encourage you to bookmark this article for ongoing reference.

In summary, the King’s Speech on November 7, 2023, brought encouraging news as the government committed to introducing a Leasehold and Freehold Reform Bill. The proposed reforms aim to make it more affordable and straightforward for leaseholders to acquire their freehold, addressing the exploitation of homeowners through excessive service charges.

leasehold reform

A draft bill entered the legislative process on November 27 and is slated for the Report and Third Reading Stages on February 27, 2024. Noteworthy changes include the removal of the marriage value concept, potentially reducing costs for lease extensions with fewer than 80 years remaining, and the introduction of a cap on ground rent at 0.1% of the property value for certain lease extensions.

This article delves into the specifics of each potential change related to lease extensions and freehold purchases. It concludes with a reflection on the decision-making process of whether to extend leases now or await the reforms.

However, the legislation may not universally benefit all leaseholders, and for some, it might even lead to increased costs for lease extensions. A concerning aspect is the absence of specified rates for deferment and capitalization, which will be determined by the government at a later date, causing uncertainty about potential cost fluctuations for lease extensions.

The government aims to balance the interests of both leaseholders and freeholders, with the sector likely advocating for lower rates to offset the impact of changes such as the elimination of marriage value and the capped ground rent. Yet, until these changes become law, there is no guarantee they will navigate the legislative process before the upcoming general election, particularly if it occurs in May 2024.

Given the prolonged anticipation for reform since 2017, it is crucial to acknowledge that the journey ahead may still be lengthy. Government promises may undergo alterations or dilution even after the introduction of the draft bill. Additionally, implementation timelines indicate that, despite the bill’s passage, some changes may not be realized until 2025 or 2026, with others potentially extending to 2028, as indicated in the Impact Assessment (see para 82).

Should You Extend Your Lease?

Providing advice on extending their leases is a challenging task, and we can only present all available information, allowing them to make their own decisions.

This challenge is exacerbated by the uncertainty surrounding the potential impact of impending changes, as their certainty and scope remain unclear.

Firstly, let’s discuss timelines. It is improbable that the bill will be passed and its changes implemented before 2025 at the earliest. If you require your lease extension completed before late 2025, it is advisable to initiate the process promptly, accounting for a year for the extension to undergo.

In our experience, significant investors often delay decisions, whereas homeowners or small landlords often proceed with lease extensions, avoiding disruption to their lives and the uncertainties tied to the new process. Acting promptly has proven wise, considering the elusive nature of leasehold reform over the last five years, coupled with Upper Tribunal decisions making extensions more costly for those who waited.

When leasehold reform becomes law, some who have already extended may regret not waiting, while others who waited may wish they hadn’t—an illustration of the adage “hindsight is 20/20.”

Outlined below are our insights based on different situations. As always, the ultimate decision rests with you.

  • Lease has 80 to 82 years. It is advisable to extend. Reforms are unlikely to be in effect before your lease falls below the “80-year mark,” where marriage value can make extensions more expensive under current legislation. Future legislation may not offer a more cost-effective solution than your current situation.
  • Planning to move or re-mortgage with the current lease restrictions: Consider extending. Avoid putting your life on hold.
  • Lease exceeds 82 years: It’s a gamble. Reforms might make it more economical, but prescribed market rates could raise costs.
  • High ground rent: Deliberate waiting. Future reforms, especially a cap on ground rent, could make it more economical for you.
  • Lease below 80 years: Consider waiting. Abolishing marriage value in the future may offer a more cost-effective solution.

What to expect from a Leasehold Reform Act?

Anticipating a Leasehold Reform Act holds expectations for numerous leaseholders, primarily focusing on potentially reducing the costs associated with extending leases or acquiring freeholds. This article delves into the various aspects and potential benefits that may arise from such legislation.

Beyond addressing cost concerns, a new Leasehold Reform Act could bring additional advantages. These may include expanding the right to buy the freehold for leaseholders currently unable to do so and introducing regulations for leasehold and estate management. Our team of lease extension solicitors and surveyors actively monitors the latest developments in leasehold law, specifically focusing on the recently proposed Leasehold and Freehold Reform Bill.

As of January 2024, this article provides an overview of the key changes proposed in the bill, which encompass:

  • Introducing a Standard Valuation Method and prescribing market rates
  • Abolishing Marriage Value
  • Capping ground rents (specifically during lease extensions)
  • Allowing longer lease extensions
  • Eliminating the two-year ownership condition
  • Abolishing leasehold houses
  • Sharing professional fees for lease extension/freehold purchase
  • Allowing the buyout of ground rent without extending the lease term

For each proposed change, the article offers insights into which categories of leaseholders stand to benefit and those who may face potential disadvantages.

Additionally, the article provides updates on critical aspects, including:

  • The ongoing ground rent consultation
  • The reasoning behind the decision not to completely abolish leasehold
  • Timelines for the reform, outlining when and how the proposed changes may be implemented.

By exploring these facets, the article aims to provide a comprehensive understanding of the latest developments in leasehold law, keeping readers informed about potential shifts that may significantly impact their property ownership and lease arrangements.

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The Proposed Amendments

With the unveiling of a draft bill, a clearer understanding emerges regarding the potential content of the forthcoming Leasehold Reform Act. However, it is crucial to note three significant caveats in interpreting the implications of this legislation:

  1. Some Aspects Remain “To Be Decided”: The draft bill designates certain critical areas for future government decisions, particularly rates influencing the cost of lease extensions. These aspects will be determined at a later stage.
  2. Additions and Removals: As the bill navigates the legislative process, adjustments are expected. Members of both houses of parliament will contribute to the bill, introducing new elements and potentially eliminating contentious ones.
  3. Contentious Changes: Despite inclusion in the draft bill, some proposed alterations are subject to debate and may face amendments or removal during the legislative process.

Outlined Changes:

  1. Standard Valuation Method & Market Rates: The draft legislation introduces a Standard Valuation Method and empowers the government to set market rates, removing the need for negotiations between professionals during lease extensions. The impact on leaseholders varies based on government rate-setting decisions.
  2. Abolish Marriage Value: The contentious elimination of Marriage Value, which currently requires leaseholders to share the profit with freeholders when extending a lease below 80 years, stands to benefit those with shorter leases, while potential repercussions are anticipated.
  3. Cap Ground Rents (during lease extensions): Ground rent caps are proposed at 0.1% of property value, with potential implications for both leaseholders and freeholders. Adjustments in the Discount Rate could offset any perceived advantages, especially for those without high ground rents.
  4. Extension of Lease to 990 Years: The bill proposes extending the lease term to 990 years. While seemingly generous, the actual financial benefit may be minimal, and concerns arise regarding potential government actions affecting costs.
  5. Abolish the Two-Year Ownership Condition: Removing the two-year ownership condition facilitates easier lease extensions for those with short leases, benefiting both buyers and sellers in such transactions.
  6. Abolish Leasehold Houses: A commitment to ban leasehold houses, while a positive move, is not explicitly included in the draft legislation and requires future amendments. The impact is expected to be minimal due to the declining prevalence of leasehold houses.
  7. Share Lease Extension/Freehold Purchase Professional Fees: The proposal to make each party cover their own costs in lease extension transactions could significantly benefit leaseholders but is likely to face opposition from the freehold community.
  8. Buy Out Ground Rent without Extending Lease Term: The provision allows leaseholders with long leases (over 150 years) to buy out ground rent without extending the lease term, introducing complexity with limited financial benefits.

While the draft bill provides insights into potential changes, the evolving legislative process and government decisions on critical aspects will shape the final Leasehold Reform Act. Stakeholders, especially leaseholders, should remain attentive to developments and potential amendments during the legislative journey.

What’s Happening with the Ground Rent Consultation?

Alongside the aforementioned draft bill, the government has initiated a comprehensive 36-question consultation focused on the potential capping of ground rents on existing leases. Originally slated to conclude on December 21, 2023, the deadline was extended to January 17, 2024, and we currently await the evaluation of the responses.

The imposition of a cap could significantly alleviate financial burdens for leaseholders facing ground rents above the specified limit. Furthermore, it has the potential to address challenges associated with property sales and mortgages, particularly those hindered by burdensome ground rents.

Five distinct options are under consideration:

  1. Complete abolition of ground rent
  2. Imposing a fixed fee cap (with £250 widely discussed)
  3. Applying a percentage cap based on property value (0.1% being discussed)
  4. Resetting ground rent to the initial lease value
  5. Freezing it at the existing ground rent

Advocating for leaseholders, Homehold supports Option 1, favouring the elimination of ground rent collection by freeholders. However, they acknowledge the likelihood of intense opposition from freeholders, making an outright ban impractical and potentially delaying any legislative changes. A similar perspective is shared by Sebastian O’Kelly, CEO of the Leasehold Knowledge Partnership charity, as outlined in an opinion piece for the i newspaper.

A fixed-level cap, particularly at or below £250, is viewed as a pragmatic solution capable of addressing numerous issues. Unlike tying ground rent to market value, this approach eliminates the need for periodic property revaluations, streamlining the process.

Potential Human Rights Concerns: Freeholders are expected to contest any ground rent removal or reduction, asserting human rights violations. The Residential Freehold Association, for instance, suggests that a government-imposed cap of £0 on all ground rents could incur a liability of £31 billion in compensation.

Legal complexities arise from the argument that reducing or eliminating ground rent violates freeholders’ human rights. Barrister Catherine Callaghan KC, consulted by the Law Commission in 2019, opined that capping ground rent at 0.1% of freehold value could be considered a human rights violation if it reduced the original payment for the leasehold property. This opinion aligns with the government’s own research briefing note on the subject.

Freeholders contend that they sold leasehold properties at a discounted rate, factoring in the value of the ground rent income. While not universally applicable, freeholders may present instances where lease costs were reduced when ground rent provisions remained in place, further complicating the evaluation of potential human rights violations.

Will the government abolish leasehold?

In the immediate future, the answer is “No”; however, there are plans for refinement. During a late January 2023 appearance on the Sophy Ridge show, Michael Gove, Secretary of State at the Department for Levelling Up, Housing and Communities, expressed a desire to “abolish” leasehold. While this statement generated excitement and positivity, it was somewhat peculiar given that the government had been focusing on proposing reforms to leasehold rather than advocating for its complete elimination. The practical challenges of abolishing and replacing millions of existing leasehold contracts were evident.

In May 2023, reports citing “Government Sources” from mainstream press clarified that the government had shifted its stance and would not abolish leasehold after all. This interpretation aligns with the current briefing note on the government website, which outlines planned reforms for leasehold rather than its abolition.

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What are the anticipated timelines for leasehold reform?

Let’s take a look at the recent history of leasehold reform before delving into potential future changes. The journey so far suggests that there may still be some distance to cover.

The government has been actively considering leasehold tenure reform since 2017, marked by the “Tackling unfair practices in the leasehold market” consultation. Despite five years of discussions, leasehold reform has remained an ongoing process without a definitive resolution. Both Labour and the Conservatives included commitments to leasehold reform in their 2019 manifestos, and in 2020, the Law Commission presented detailed reform proposals.

The Competition and Markets Authority’s 2019 investigation into ground rent clauses also played a role, leading some major freeholders to revise terms to comply with consumer protection laws. An optimistic moment occurred in January 2021 when Housing Secretary Robert Jenrick pledged two separate pieces of legislation for leasehold reform. The first part, the Leasehold Reform (Ground Rent) Act 2022, was swiftly passed, banning ground rents in nearly all new leases.

However, the second part, aimed at benefiting existing leaseholders, faced delays and was not introduced in the 2022/2023 Parliamentary session. As of January 2024, there is renewed hope. The government has promised a Leasehold Reform Bill, introduced in the House of Commons, with approximately a year for the legislative process before the next general election. What’s the legislative process for leasehold reform? The legislative process involves several stages, starting with the bill’s introduction in the House of Commons, followed by readings, committee processes, and debates in both the House of Commons and the House of Lords.

Disagreements between the two houses may result in the bill “ping-ponging” between them until consensus is reached. Given this bill’s complexity and contention, the process is expected to be time-consuming. Once agreed upon, secondary legislation will determine key rates for lease extension and freehold purchase calculations, likely prompting a government consultation.

An implementation period is anticipated after the bill’s passage, with estimates suggesting completion by 2028, subject to potential adjustments. However, uncertainties exist, as parliamentary priorities and the bill’s reception may influence the timeline. Lord Greenhalgh, a key figure in leasehold reform, suggested in April 2023 that a bill might be introduced for scrutiny but not passed before the next election.

While a Leasehold Reform Act in 2024 is not guaranteed, it remains a possibility contingent on parliamentary commitment and progress in the coming months.