Right in the middle of Brexit, we have an announcement from MHCLG that Robert Jenrick as Housing Secretary plans to get government to act on the proposed reforms to residential leasehold.
For those who have been following this story, this is the culmination of the journey that started with the commentary in the White Paper ‘Fixing our Broken Housing Market’ and then led to the paper ‘Tackling Unfair Practices in the Leasehold Market.’ After this we had the Law Commission’s extensive work on the proposed reforms in this areas which led to the publication of their output paper ‘Leasehold home ownership: buying your freehold or extending your lease’ published on 20th July of last year.
Government now plans to act and this announcement makes plain their desire to adopt a number of the Law Commission’s recommendations, although what is also clear is that they plan to do this in two stage, the first most likely to be to take steps to ban ground rents and the second to pave the way for more comprehensive leasehold reform.
The exact details will become clearer in due course, but the headline news items that we can take away from today’s announcement are as follows:
- no more marriage value
- 990-year lease extensions at nil rent
- An industry wide commission on Commonhold – a ‘Commonhold Council’ charged with preparing the way to make this work
These are all massive changes and shows the government’s resolve to pick up on a number of the key recommendations in the Law Commission’s report.
Some initial comments on these appear below:
No more marriage value
This is massive and will not be popular with freeholders to say the least. It certainly will make it ‘cheaper’ to extend a lease or buy the freehold. There is also an indication that a calculator will be made available to determine claims, whether the ‘calculator’ is to apply to all claims, or just simpler or lower value claims remains to be seen.
However, the proposal to remove marriage value (which often comprises up to 1/3 or more of the premium in many mid-lease length cases) is big news. There is almost certain to be a challenge from the larger freeholders under Human Rights legislation or similar. If we consider the position of say a high value flat on one of the Central London ‘Great Estates’ this is going to be significant.
990-year lease extensions at a nil rent
This is not a surprise – the plus 90-year lease extension has just been upgraded, by another 900 years and so won’t need doing again.
The nil rent element is no surprise either as this was (and is) the case for statutory extensions as things stand. The ‘surprise’ is in relation to leasehold houses – the new lease will be at a nil rent rather than the ‘modern ground rent’ under the plus 50 year extension that exists (and is never used) at the moment. You might ask what the point of this is – but it does give a leasehold house owner the right to make the lease much longer and buy out any existing ground rent in one go – although the current note is silent on buying the freehold – presumably MHCLG will propose to adopt in due course the Law Commission’s recommendations on making ‘units’ enfranchiseable so that both flats and houses are subject to the same regime.
The relevance to houses is a particular response to the so called ‘Leasehold Scandal’ of leasehold houses being sold by developers with onerous rent terms which in part have sparked the governments interest into reforming the law in this area.
It also appears that a cap will be set on the sort of ground rent that can be charged if lease is renewed outside of the statutory process. The detail is currently unclear, but possibly this may follow the Law Commission’s recommendations that any new rent could be imposed only during the existing lease term and might be subject to an overall cap. There is certainly an indication of a cap on the ground rent payable.
We’ve been here before – when the Commonhold and Leasehold Reform Act 2002 came into force, in 2003, but this time there does appear to be a willingness to recognise that unless it can be made fit for purpose and also the “industry standard” (and possibly also compulsory?) there will be no take up.
An industry-wide cross sector committee would be very welcome to iron out the issues and to set the frame for other reforms that may be needed to make it work. Unfortunately, the current version of Commonhold is not sophisticated enough – and proper refinement for implementation may require other areas of law to be dealt with as part of this process.
So, what next?
As ever with a packed parliamentary agenda including both Brexit and Covid-19 we will have to wait and see. However, this announcement does make plain that legislation will be brought forward in ‘in the up and coming session of parliament’ to set ground rents to zero. The announcement states that this is part of a two-stage process of reforming the law with a response to the remaining Law Commission recommendations ‘in due course.’ That appears to indicate a longer time frame for the wider reforms.
What does that mean in practice?
If you are extending your lease at the moment, no change. None of this is law yet, nor is it certain when it will be. Perhaps the ground rent change (for new leases only) will come into effect in the next 1-2 years. The other more wider reforms might well take a lot longer – there is no draft bill for either of the proposals discussed in this note at the moment. Even once a bill is prepared it has to get through parliament and as mentioned above it is likely that the proposed radical reforms to the valuation mechanism will be challenged. That could well delay progress.
We have been estimating a 3-5 year time line before any of this may become law and what is not clear is even if the law does change what form any changes may take. So in other words, if you have a property affected by these issues you will most likely still need to take action now as the mere ‘prospect’ of reform is not likely to be something that will resolve any existing issues.
If you would like to discuss any of the points raised in this article, please do contact a member of the leasehold team by emailing email@example.com or call 0207 631 4141 and ask to speak to a member of the Landlord and Tenant team.
Mark Chick Senior Partner