The King’s Speech on 7 November 2023 has finally provided some welcome clarity about the key elements of the Government’s next phase of residential leasehold reform.
The proposal for the Leasehold and Freehold Bill shows an ongoing commitment by the Government to reform leasehold and fulfil its promise to make extending your lease or buying your freehold ‘easier, faster, fairer and cheaper' for leaseholders.
The proposal for a Bill outlines a number of reforms to the leasehold system, which will extend rights to more categories of leaseholder and introduce changes to reduce costs, all of which will be welcome news for leasehold homeowners. But what does this mean for leaseholders looking to start a claim for enfranchisement – or those whose claim to extend their lease or buy their freehold is already underway?
Here, Mark Chick, Senior Partner at Bishop & Sewell and an expert in Landlord and Tenant matters explains.
When will any reforms be introduced?
The key question at this stage is when any such leasehold reforms will be introduced. This depends on how any draft Bill seeks to address the proposed changes and what happens once this is debated by parliament.
It also depends on where any draft Bill sits in the order of parliamentary business. Clearly, the earlier it is considered the quicker it might become law. We must also bear in mind that there is going to be a general election at some point between now and the end of 2024.
Taking the most optimistic view possible (and assuming a non-controversial set of provisions) an initial piece of legislation could perhaps make it towards the statute books within 12 to 18 months.
What will be in any new Bill or Act?
There are the fairly well-documented promises – some of which will be easier to deliver on than others.
By way of a recap in summary these are:
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Increasing the standard statutory lease extension term from 90 years to 990 years
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Removing the requirement for leaseholders to own their house or flat for two years before they can extend their lease
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Increasing 25% non-residential threshold for mixed-use property
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Banning the creation of new leasehold houses
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Capping ground rents - on which a consultation has been opened
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Potentially removing marriage value from the calculation for leases under 80 years
There is also the issue of the parliamentary process to consider – and the potential for the proposed legislation getting bogged down either in the House of Commons or in the Lords when debated, and the possibility of a Human Rights Act challenge on some of the more controversial elements.
Such a challenge could look at the significant rebalancing of value which would occur if marriage value ceases to be part of the calculation. Effectively, this would hand millions of pounds of value from freeholders to leaseholders, many of whom will be investors themselves.
Separately, the proposed introduction of a cap on ground rents, and/or a complete restriction on ground rents being payable under existing leases, is also potentially contentious.
A consultation on ground rents is underway (LINK) but the potential impact on areas such as the pensions industry are yet untested. As to whether this will end up with a further challenge or revision to any of these provisions remains to be seen.
Predictions
It is hard to predict what might happen, but one outcome could be delivery on the ‘less contentious’ parts - such as the 990 year lease extension, the abolition of the two year rule etc - but a later or delayed delivery on some or all of the valuation aspects.
The current ground rent consultation presents one of the options being a phased implementation, which would produce less of a ‘cliff edge’ effect. This would also mean that any immediate benefit would be less dramatic.
A further problem for leaseholders would then be that if any of the valuation changes do not come in – or do not come in as fully as might be initially anticipated; in this case the price of waiting to take action might be increased costs because of diminishing lease length.
Cost benefit analysis
Whenever there have been dramatic price adjustments in the past - such as in 2007/ 2008 -many leaseholders have considered withdrawing claims to extend a lease or purchase their freehold. In many of these cases the cost benefit analysis did not –support withdrawing. If the premium being paid is not that significant relative to the value of the flat and given that a significant proportion of the likely costs will be incurred in any event, withdrawing and starting again does not often equate to better value.
I appreciate that with one of these proposed reforms we are talking about a possible change to a significant part of the calculation - marriage value - often this can be around 20-30% of the premium. But it is just that: a fraction of the overall cost, and if this is your situation you should seek to understand the actual likely amount and consider this with all other relevant costs - including for instance finance or other ongoing costs - if the current lease length prevents sale or re-mortgage.
Should I stay or should I go?
This is always a difficult question, but if you are about to issue a claim then perhaps consider that as with any significant legislative change, leasehold reform timescales are quite ‘long.’
The length of a typical claim is around 10- 12 months from beginning to end, and in a case of any complexity, more like 18 months and in some cases quite possibly more.
Applying to the tribunal - after say 4-5 months of negotiation - will add at least another 2-3 months to any claim. There is also a 4 month window to complete at the end of any claim and with the right advice this can sometimes be extended.
Therefore, it would be perfectly possible to start a claim now and then (if and when) the scope and timing of any changes become clearer, to use this a leverage to negotiate - and /or to take advantage of these changes as and when they come in.
This could provide a tactical route to managing any current or anticipated claims. Clearly those advising will need to be suitably adept and experienced in this area.
What to do now?
As ever, specific advice will be required in each individual case as to whether to proceed and what the right thing to do may be.
For leaseholders who are looking to sell their property imminently, the one point of certainty is that if a property is currently un-mortgageable or unsaleable because of lease length or other issues (such as an onerous ground rent), then the only course of action that will remedy this is to take action under the existing legislation.
For leases that are nearing the 80-year mark, or have already fallen below, the question of timing depends on the owner’s precise circumstances and immediate priorities. Whilst many will still need to act now, others may wish to hold off pending future legislative changes being brought into effect.
Those who wait will need to balance the risk caused by any delay in doing so.
Mark is the Director of ALEP and Senior Partner of Bishop & Sewell
This note has been prepared based on the information available at the time of writing and is not a substitute for legal advice. Advice in relation to any particular matter or set of facts will need to be considered on a case by case basis.
