A Clearer View

Lisa Simon, Partner and Head of Residential Division, offers a practical update on residential letting issues currently in the news.

On Tuesday 11 December the Leasehold and Freehold Bill passed its Second Reading in the House of Commons, just 33 days after it was announced in the King's Speech and 14 days since it was published. 

Background

The Bill is the second part of a legislative package to reform leasehold law. It follows the Leasehold Reform (Ground Rent) Act 2022, which put an end to ground rents for most new residential leasehold properties in England and Wales and follows a Government-commissioned review of leasehold law by the Law Commission which was completed in 2017. 

The legislation has been a long time coming, but the speed at which is it being pushed through Parliament (specifically compared to the Renters Reform Bill which was originally conceived four prime ministers ago and now at the same stage in the parliamentary process) shows the Government’s enthusiasm to see it enacted. 

At its Second Reading, the Bill was broadly welcomed, attracting cross-party support despite criticism that it does not go far enough.

What is the Leasehold and Freehold Bill and how will it impact on landlords?

The Government is, “Committed to promoting fairness and transparency for leaseholders and ensuring that consumers are protected from abuse and poor service.”

Consequently, the Bill aims to empower leaseholders and strengthen their consumer rights. 

More specifically, the guidance in relation to the Leasehold and Freehold Reform Bill states that it will:

• Increase the standard lease extension term for houses and flats to 990-years (up from 90 years in flats, and 50 years in houses), with ground rent reduced to a peppercorn (zero financial value) upon payment of a premium. 
• Remove ‘marriage value’, which makes it more expensive to extend leases close to expiry.
• Remove the requirement for a new leaseholder to have owned their house or flat for two years before they can benefit from these changes.
• Increase the 25% ‘non-residential’ limit preventing leaseholders in buildings with a mixture of homes and other uses such as shops and offices, from buying their freehold or taking over management of their buildings – to allow leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or take over its management.
• Make buying or selling a leasehold property quicker and easier by setting a maximum time and fee for the provision of information required to make a sale (such as building insurance or financial records) to a leaseholder by their freeholder.
• Require transparency over leaseholders’ service charges.
• Replace buildings insurance commissions for managing agents, landlords and freeholders with transparent administration fees.
• Extend access to “redress” schemes for leaseholders to challenge poor practice. 
• End the presumption for leaseholders to pay their freeholders’ legal costs when challenging poor practice. 
• Grant freehold homeowners on private and mixed tenure estates the same rights of redress as leaseholders by extending equivalent rights to transparency over their estate charges, and enable them to challenge the charges they pay by taking a case to a Tribunal.
• Build on the legislation brought forward by the Building Safety Act 2022, ensuring that freeholders and developers are liable to fund building remediation work.
• Ban 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.

Concerns raised

The most contentious aspect of the Bill is in relation to this final bullet point: the fact that it excludes a previously promised plan to ban leasehold houses. The Government has said that it will amend the legislation to address this omission. 

The Bill was also criticised for omitting the elimination of marriage value and the requirement for managing freeholders to belong to a redress scheme.

Labour MPs expressed concerns that the Bill does not include support for introducing commonhold as an alternative form of tenure automatically on new-build homes. Shadow Housing Secretary Angela Rayner, MP, stated in the course of the debate that a future Labour government would go further and implement all the measures recommended by the Law Commission, including making commonhold the default tenure for all types of home

Those who wish to see leasehold maintained (and most landlords are likely to fall into this category because of the substantial value attached to leases), will be keen to see this legislation enacted before the next general election, as the approach of a Labour Government is likely to extend the remit of reform. 

The legislation will now enter committee stage and continue its progress through the House of Commons and House of Lords.

Ground rents consultation

Alongside the Bill, the Government launched a consultation, Modern leasehold: restricting ground rent for existing leases which seeks views on options to restrict ground rents for existing leaseholders. The previously short deadline has recently been extended to 17 January 2024.

The Secretary of State has stated that his preferred option is to cap ground rents at a ‘peppercorn’ (effectively zero), which would align them with new leaseholds established since 30 June 2022. However, the way in which the Leasehold and Freehold Bill will be amended in relation to ground rents will depend on the outcome of this consultation.

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