In this, the first of a series of three articles, we look at what it means for residential leaseholders and their landlords with regard to enfranchisement rights (leaseholders rights to extend their lease or acquire the freehold of their house or block) now that the Government has stated that it will implement the provisions of the Leasehold and Freehold Reform Act 2024.
The King’s Speech of 17th July 2024 announced that the Government’s legislative programme would include draft legislation on leasehold and commonhold reform: the “Draft Leasehold and Commonhold Reform Bill.”
This implied that the Government might have in mind leaving the conservative’s legislation, The Leasehold and Freehold Reform Act 2024, on the shelf and perhaps implement a wider set of reforms and consolidate the existing law following the recommendations made by the Law Commission.
It is now clear from the background briefing issued subsequently, that the Government will instead deal with this in phases - it will:
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Implement the provisions of the Leasehold and Freehold Reform Act 2024 (which received royal assent just prior to the closure of Government for the election) – this includes some of the Law Commission’s recommendations around enfranchisement and the right to manage. It did not make any changes to Commonhold;
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Enact the remaining Law Commission recommendations relating to leasehold enfranchisement and the Right to Manage;
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Make retrospective changes to lease contracts to amend the ground rent payable to “Tackle unregulated and unaffordable ground rents”;
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Change the rules around a landlord’s right to terminate a lease where the tenant is in breach of their obligations to “Remove the disproportionate and draconian threat of forfeiture as a means of ensuring compliance with a lease agreement”;
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Reinvigorate Commonhold “through a comprehensive new legal framework and banning the sale of new leasehold flats so commonhold becomes the default tenure.”
So what changes will leaseholders and landlords see from the implementation of The Leasehold and Freehold Reform Act 2024?
The story so far and timing
Only a few provisions came into force with the Act receiving Royal Assent. None of those related to enfranchisement rights.
It remains to be seen how quickly the Government will bring the balance of the provisions into force ,i.e. scrapping marriage value that affects leases with less than 80 years left to run, and where they will set the rates that determine the other components of the premium payable to acquire an extended lease or the freehold.
Implementation may be undertaken in stages, and secondary legislation will be needed for some. Timing remains to be confirmed.
Major changes are coming:
Premium and Costs
The cost of enfranchisement is set to fall as:
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Marriage value will be scrapped;
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Onerous elements of ground rent are to be ignored for the purpose of the calculation; it would no longer take into consideration a ground rent in excess of 0.1% of freehold value.
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The rates for the other components of the premium payable may be set in favour of leaseholders - the government will prescribe the rates used to calculate the premium (the deferment and capitalization rates) through regulations.
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In most cases they won’t have to reimburse their landlord’s costs;
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In a collective claim leaseholders can avoid having to pay for the value of the reversion attributable to flats that opt not to participate and require the landlord to retain possession of other units such as shops and unlet flats (rather than potentially having to effectively buy them).
Buying out the ground rent
A new stand-alone right to buy out ground rent obligation will be available to leaseholders who have over 150 years of their lease term remaining. So they will no longer have to extend their lease or buy the freehold to achieve this. A premium will be payable in this regard as with those other rights.
This may prove popular amongst those who have bought a new build flat in the last 10 years or so.
Of course as the government stating its intention to amend ground rents retrospectively, leaseholders will be likely to wait and see what effect this has on the rent they must pay as that is likely to feed into the premium they must pay to buy out the ground rent.
Changes to enfranchisement rights and procedure
These include:
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Longer extensions for all - 990-year lease extensions will replace the current 90-year extensions for flat leaseholders, and 50 for house owners.
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Two-year qualifying period of ownership is to be abolished – This will benefit both sellers and buyers of leasehold flats and houses, as buyers can make a claim to extend the lease or acquire the freehold immediately upon taking ownership. Currently they must wait 2 years or go through the rigmarole of arranging for their seller to commence the relevant claim and assign it to them with the additional costs and associated risks that currently exist.
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Those who have extended under the old rules recently will be able to avail themselves of a 990-year extension as restrictions on repeated enfranchisement and extension claims will end.
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The freehold of buildings with up to 50% non-residential use can be acquired - The current restriction on flat owners not being able to acquire their freehold (or the right to manage) where the non-residential element exceeds 25% will increase to 50%. This will increase the number of buildings to which these rights will apply.
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Eligibility is to be expanded and the ability for landlords to block claims reduced:
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Redevelopment restrictions on enfranchisement and extension for both flats and houses will go. Landlords will continue to have a (modified) set of statutory break rights during the lease term.
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Landlord’s right to defeat a house claim for possession for personal use will be abolished.
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Sublessees will be given the right to claim an extended lease where their landlord obtained a statutory extension in the past.
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Community landlord trusts/housing providers are to be exempt from freehold acquisitions (not lease extensions).
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The National Trust continues to be immune from freehold claims, but not lease extension claims. This does not include visitor attraction properties and donor leases which will be dealt with by regulation. The National Trust then has the ability to buy back an extended lease by way of right of first refusal at market value if the existing leaseholder chooses to dispose of their lease, thus enabling it to manage long-term use of inalienable land.
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Intermediate leasehold interests:
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For valuation purposes, these are to be treated differently which may benefit leaseholders; they are to be treated as if they had been merged into the freehold for the purpose of determining the premium the leaseholder has to pay. This is intended to simplify the valuation process and potentially reduce the premium payable.
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Intermediate leaseholders are to receive a new right to commute the onward rent they must pay their landlord in turn to reflect their loss of ground rent income.
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In a collective claim the participants’ nominee purchaser can opt not to acquire any intermediate lease relating to a non-participant’s flat, potentially reducing the premium they must pay.
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Leaseholders will be able to require their landlord to take a lease-back of any unit that isn’t let to a participating tenant. This will avoid them being priced out of making such claims where the landlord does not opt to take a lease back of such units, which can leave leaseholders having to decide whether they have deep enough pockets to afford certain reversions, such as commercial units let on a rack rent basis.
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Cost regime– Broadly speaking leaseholders will no longer have to pay the landlord’s costs of dealing with their claim, such as valuation and legal fees. Instead, each party will bear their own costs. A floor level of protected premium is to be set for which landlords will be permitted to recoup certain costs.
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The jurisdiction of the First tier Tribunal (FtT) is to be increased so that as far as possible all disputes will be dealt with by it. This will benefit leaseholders as it is a no costs forum, meaning that in most cases each party will pay their own litigation costs.
Other changes:
The right to manage benefits from a similar change to the non-residential limit and costs recovery. Much more had been proposed by the Law Commission.
There are a number of changes around the regulation of leasehold properties relating to service charges, insurance, administration charges, litigation costs, appointment of managers by Tribunal and sale information requests.
A ban on the grant or assignment of certain long residential leases of houses will apply.
Conclusion:
Leaseholders will now have to decide whether to wait and see how long it takes the government to implement these changes and how it affects the premium they must pay.
For those who cannot wait, they may be forced to pay a higher premium than they might benefit from in time.
Depending on where the government sets deferment rates for those with less than 80 years left to run of their lease term it may profit by waiting (if they are held where they are) or not (if they are reduced significantly).
For those with well over 80 years remaining, landlord’s costs can sometimes make up a significant proportion of the overall cost of extending and so those leaseholders may prefer to wait. However, it remains to be seen what floor, protected level of premium the government sets below which landlords will still be able to recoup their costs and what the allowable costs figure will be.
Our next article will look at the changes likely to be contained in the Bill being those of the Law Commission’s recommendations around enfranchisement and the right to manage that The Leasehold and Freehold Reform Act 2024 did not contain.
Mark Vinall, Partner, Ashley Wilson
