There have long been demands for leasehold reform – for an overhaul of the UK’s complex leasehold rules. The existing system is difficult to navigate and can be inflexible and expensive for owners of leasehold flats and houses.
The government intends to make the leasehold system fairer for leaseholders. Currently, freeholders can force leaseholders to pay substantial and increasing amounts for ground rent and service charges. While they may already have the right to buy their freehold, this can be expensive. The method for calculating the premium is complex and can make the process time-consuming.
In the King’s Speech on 7 November 2023, the government announced its intention to make it cheaper and easier for leaseholders to purchase their freehold. It also intends to tackle the exploitation of millions of homeowners through punitive service charges.
As a result, on November 27th, 2023, the Government introduced the Leasehold and Freehold Reform Bill.
Leasehold Reform Latest News – February 28th, 2024
Having earlier passed both the 1st and 2nd Reading Stage, the Committee Stage, where they heard evidence from experts and interest groups, along with line-by-line scrutiny, the Bill passed its third reading on Tuesday 27 February, and has now gone to the House of Lords for further consideration.
It appears that there have already been hundreds of amendments during parliamentary debates which some campaigners claim have weakened the promised changes.
Some sense that this is a rush job, with insufficient time being given to Parliament to properly scrutinise amendments. A number of amendments proposed changes by Labour MPs were mainly rejected. Some of the proposed amendments were very radical – including one rejected proposal to put an end to forfeiture entirely.
However one error in the original draft was corrected – the planned ban on new leasehold houses is now part of the Bill.
It remains to be seen how the House of Lords approach the Bill. And remember nothing is certain until the Bill actually comes into force.
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What changes does the Leasehold and Freehold Reform Bill contain?
The main reforms contained in the Leasehold and Freehold Reform Bill include:
· Making it cheaper and easier to extend a lease
· Dealing with ground rent increases
· Making service charges more transparent
· Making it easier for leaseholders to buy their freehold
But what about the proposed future ban on leasehold houses?
The expectation was that, other than in exceptional circumstances, every new house in England and Wales would have a freehold, rather than leasehold, title from day one.
But despite repeated promises from the UK Government to outlaw the creation of new leasehold houses, which was repeated in the King speech, the new bill failed to address it.
It’s not entirely sure clear why, although some have suggested it may have simply been an error.
But along with some other issues, a clause allowing for a ban on the sale of new leasehold houses has been tabled as an amendment to the Bill. If passed, this would mean that every NEW house in Engand and Wales will be freehold (other than in exceptional circumstances).
Therefore currently, there is still no ban on new leasehold houses. And there is no suggestion of any automatic or free conversion of all existing leasehold houses to freehold. If you want to do that, it looks like you’ll still need to go through the process of enfranchisement.
Click here to read more about the freehold purchase of leasehold houses – House Enfranchisement
Leasehold Reform – Making it cheaper and easier to extend a lease – including the removal of marriage value
· Currently, you need to own your property for two years before you can legally require your freeholder to extend your lease. It is proposed to end this requirement.
· At the moment there is an immediate hike in the premium you will need to pay to extend your lease the moment it drops below 80 years – because an additional payment is due – known as “marriage value”.
Those with a lease with less than 80 years remaining need to have that ‘marriage value’ calculated by an expert surveyor to determine how much they need to pay for their lease extension. This is a notoriously complicated calculation and leads to much negotiation, making the process slow and cumbersome.
The Bill proposes abolishing marriage value and bringing in a set method of calculating the premium payable to the freeholder for a lease extension. This will reduce the discussion between freeholders, leaseholders and valuers over a fair figure and should also make the process faster.
· The ground rent will be reduced to zero when a lease is extended.
· The standard lease extension term (available if you use the formal statutory lease extension process rather than agreeing an informal extension with your freeholder) will be increased to 990 years, up from 90 years for flats and 50 years for houses. The introduction of the much longer term is unlikely to significantly increase the cost of extending your lease.
Click here to read more about how our Lease Extension Solicitors can help you
Leasehold Reform – Dealing with ground rent increases
Leases that currently allow for substantial increases in ground rent can make properties unsaleable. The legislation proposes a range of options, including:
· capping ground rents at a peppercorn for existing leaseholders
· freezing ground rents at current levels
· capping ground rent at a percentage of the property value, potentially 0.1%
This particular issue went out for a public consultation, which closed on 17 January 2024.
Leasehold Reform – Making service charges more transparent
The Bill proposes making service charges more transparent, with leaseholders entitled to receive key financial and non-financial information in an annual report.
Insurance information must be provided to leaseholders and buildings insurance commission will be replaced with transparent administration fees.
Freeholders and managing agents will be required to provide information to leaseholders within a set time limit, making it less likely that this will hold up property sales. Leaseholders will have the right to request a range of information, including that relating to management, provision of services, maintenance, repairs and insurance.
Some of these rights will also apply to homeowners on new build estates where charges are made for the upkeep of communal areas.
Leasehold Reform – Making it easier for leaseholders to buy their freehold
Flat owners will no longer need to wait two years to gain the right to buy their freehold.
As with lease extensions, there is an intention to set out a method of calculating the premium to give leaseholders greater certainty and speed up the purchase process.
There is currently no right to buy the freehold if more than 25% of the property is non-residential (e.g. used as shops or offices); the Bill proposes increasing this to 50%. A similar change in availability applies to the right to manage.
Click here to read more about the Right to Manage your block
Additional expected amendments to the Bill.
In addition to the ban on leasehold houses, the government has confirmed that the following additional elements will also be introduced to the bill as amendments as it goes through Parliament:
· setting a maximum time and fee for the freeholder to provide the information needed for any sale to through (including building insurance and financial records) – which should make both buying or selling any leasehold property both easier and quicker.
· making sure that those freeholders who are managing their building directly, will be part of a redress scheme. This will enable leaseholders to challenge poor management of the building by the freeholder. It will also scrap the presumption for leaseholders to pay their freeholders’ legal costs when challenging poor practice.
· extending the scope of the Building Safety Act 2022 to ensure it protects individual leaseholders by operating as originally intended -in particular to make sure that both. property developers and freeholders and developers cannot avoid their liability to pay for building remediation work
When will the Leasehold and Freehold Reform Bill become law?
The bill has been slow in coming. It follows commitments in the 2017 housing white paper, the 2017Conservative Party Manifesto 2017 leasehold reform recommendations in leasehold reform made by the Law Commission in 2020.
The government has been considering reforms for more than five years. It is a complex area of law and the Bill is likely to take a substantial amount of time to be reviewed and amended by the Houses of Commons and Lords.
The government has also issued a separate consultation looking at ground rent and this will also take time.
With a new Housing Minister in place, the 13th since 2010, and a general election on the horizon, the new act could be at least a year away. However, the speed with which the government introduced the draft bill after announcing it in the Kings speech and the speed with which they’re pushing it through (allied to a growing trend with the UK government to push through legislation without the kind of detailed examination it would routinely have experienced in the past) may mean that they’re determined to get this through.
Remember, a general election needs to be called by January 2025 at the latest. It’s highly likely to be called before then – with many commentators suggesting it could be spring 2024 or autumn 2025. So Parliamentary time could be tight. However, some commentators have suggested that the Bill might be in force by June 2024
It’s also worth noting that although a number of these changes will be welcomed by most leaseholders, other influential organisations won’t be as pleased. In particular
there are a significant number of organisations – such as those with vested interests, and pension funds (who have invested heavily in freeholds on the basis that significant increases in ground rent income appear to be guaranteed under the lease involved), may lose out significantly – and may as a result consider challenging this proposed legislation.
Should I extend my lease or buy my freehold now or wait until the Bill passes?
If you are currently considering when to extend your lease or working with your fellow leaseholders to buy the freehold of your flats, you need to decide whether to go ahead or wait for the bill’s passing.
The first point to consider is that there are no guarantees that the Bill will pass. If your lease is dropping towards the 80-year remaining mark, you could face difficulties if you want to sell your property. Lenders can be reluctant to lend against shorter leases.
If you cannot sell your property, extending your lease will likely take several months, meaning you will have to put your plans on hold until this is dealt with.
Another point to consider is that it is not certain that it will be cheaper to extend a lease after the Bill passes, as the method of calculating the premium still needs to be decided.
If you still have a lengthy term remaining on your lease, for example, 100 years or more, you might prefer to wait for the Bill to pass. Similarly, if your ground rent is currently high, the Bill could reduce this and any related figures.
Much of the same points apply to buying the freehold. If you and your fellow flat owners have purchased the shared freehold, you can already grant yourselves lease extensions for free. This means it could be beneficial for you to proceed with the freehold purchase now if you have around 80 years or less remaining on your leases.
The question of whether to wait is difficult, with valuations depending on several figures, including the terms remaining on leases and the level of ground rent. You may want to speak to an expert before deciding to make sure you are making an informed choice.