Banning the sale of new leasehold houses had been trailed in the King’s Speech; a press release later issued by the Department for Levelling Up, Housing and Communities announcing The Leasehold and Freehold Reform Bill stated that the Bill would include provisions “Banning the sale of new leasehold houses so that, other than in exceptional circumstances, every new house in England and Wales will be freehold from the outset.
These proposals were not present in the Bill as originally submitted, nor were proposals brought forward at Committee stage when the Government succeeded in making a large number of other amendments to the Bill.
The Government has now succeeded in amending the Bill to introduce these provisions during the Third Reading. They also introduced additional protections for leaseholders by extending the measures in the Building Safety Act 2022.
An entirely new part (Part 1) of the Bill has been introduced to deal with the Ban plus a corresponding Schedule.
So how does the Ban work, and is it water-tight?
The ban is against the grant of a long residential lease of a house unless it is a permitted lease. So not every house lease will be caught and there will be a number of exclusions.
Long residential lease of a house
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The primary definition of a “long” lease is that it exceeds 21 years. It also includes leases granted for life or marriage, those that can be perpetually renewed and provides for series of leases .So granting a lease for 21 years or less is not banned.
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To be “residential” the terms of the lease must not prevent it from being occupied as a separate dwelling - including a requirement to use it as two or more dwellings would potentially take it outside the ban.
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To be a lease of a “house” it must demise only one house (with or without appurtenant property), and where it forms part of a building it can’t have “the whole or a material part” above or below some other part of the building. Determined developers might therefore design the development to have material overlap or design the lease in a way that sidesteps the ban.
That said, in the future the Secretary of State may issue regulations amending these definitions so as to tighten the net.
The following situations would potentially be excluded (permitted lease):
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Developers with “historic leasehold estates” – If a developer acquired a site on a leasehold basis prior to 22.12.2017 (lease granted or pursuant to an agreement entered into before that), this exclusion would allow them to resell houses which were constructed at that time on a leasehold basis.
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Community housing leases - Where the Landlord is a community land trust, or the lease is of a house within a building controlled or managed by co-operative societies, subject to further conditions that might be made by regulations.
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Retirement housing leases - Where the tenant was at least 55 years old on the grant of the lease, the lease contains a prohibition against disposal to anyone younger, and the house forms part of a retirement development/scheme in which leases of all houses are granted on that basis.
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Leases of certain National Trust properties (as specified in Part 1, Schedule to National Trust Act 1907 (properties to be held and preserved for benefit of nation) or s.8 of National Trust Act 1939 (mansion and lands to inalienable by National Trust)).
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Lease granted pursuant to a pre-commencement contract.
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Shared ownership leases, broadly being those where the tenant can staircase in increments of 25% or less, with the price being based on market value, rent reducing accordingly, and with the ability to staircase to a 100% share (this last point may be waived by regulations).
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Home finance plan leases (as defined at clause 7), with the ability for Secretary of State to tighten up requirements via regulation.
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Extended leases (so those granted under the 1967 Act, those granted in return for a surrendered lease of that house or on a deemed surrender and regrant of a pre-commencement lease).
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Certain agricultural leases (as defined at clause 9).
A lease may come into the ambit of the ban after it is granted, if the nature of the property changes to become a house. An assignment or grant of a subsequent lease out of that post-commencement lease will be caught/banned (i.e. house leases granted out of a building lease once constructed).
Leases of houses granted in breach of the ban remain valid but subject to redress; the rights holder (leaseholder or lender) can, for nil consideration, acquire the freehold and any superior leasehold estate in the land.
This right falls away with the lease, save statutory continuation of it at the end of the term or once the reversion is acquired.
The precise procedure to exercise the right to acquire the freehold is to be set out in regulations - for now the matters they should address are set out.
Contracting out is not permitted.
Gatekeepers
Permitted leases must be certified either by the Tribunal or self-certified as above (The Tribunal can issue bulk certification).
Estate agents as “promoters” can’t make any material marketing of the house available unless the permitted lease information relating to it is included/provided, with that material namely to confirm and evidence that it is a permitted lease.
Transaction warning conditions need to be met in relation to an agreement to grant a permitted lease, which is to be given by the landlord to the prospective tenant in a specified form and manner setting out similar information. Landlords can obtain protection by including reference to the warning notice and notice of receipt in the lease.
The Land Registry will require that they see prescribed statements in any long lease of land: whether it’s a long residential lease of a house, and if so, that it’s a permitted lease. Absent that they will enter a restriction preventing disposals other than creation of a legal charge which can only be removed if the lease is varied to include the relevant statement.
Trading standards are to enforce and can levy financial penalties (not less than £500 or more than £30,000) per breach, such as contracting to grant a lease or assigning. Estate agents are favoured with having a one-breach treatment for issuing marketing material on more than one occasion for the same matter.
Conclusion
The Bill is now with the House of Lords where it may be amended further before it comes back to the House of Commons for consideration of amendments and ultimately Royal Assent.
Mark Vinall, Partner, Ashley Wilson
