It is anticipated that, after substantial delay, the government’s intention to introduce a Leasehold Bill will be formally announced in the King’s Speech tomorrow.
The drafting of that Bill is believed to be already underway and we have some indication of the likely content: changes to 990-year lease terms, removal of the two-year qualification period, abolition of ‘marriage value’, changes to estate management charges and the 25% non-residential rule, a cap existing ground rent to a peppercorn level and the possibility that all new houses must be sold as freehold in future.
Bearing in mind a fairly short timeframe in which this legislation would need to be enacted – leasehold reform is incredibly complex and we are likely to face a general election within a year which will not doubt distract politicians – it is import for the industry to understand the likely implications of the future legislation.
This article addresses some of the potential changes which will be of particular interest to readers of Property Industry Eye.
All new houses to be freehold rather than leasehold
After this potential change was first announced the numbers of houses being sold leasehold has dropped considerably. Having ground rent on a leasehold house was means by which housebuilders could keep an element of value which could then be sold onwards. While this change would reduce leasehold costs for the property owner, it would inevitably raise the initial cost of the house.
Capping of existing ground rent to a ‘peppercorn’ level
To change the costs payable for ground rent would be an extraordinary intervention into what are privately negotiated contracts and no doubt would not be well received by the reversionary owners of those leases.
The financial implications of such a change could extend beyond the freeholder and leaseholder: until recently, ground rent investments were seen as strong, stable income and therefore were attractive to pension funds. If ground rents are wiped to a peppercorn with immediate effect the value of those investments essentially becomes zero (unless there is any reversionary element, but the value of that will be diminished by the removal of marriage value). In these circumstances, many of us would lose out financially.
Leases to be extended from 90 to 990 years
Leaseholders currently have a statutory right to extend their lease by an additional 90 years and remove the ground rent under The Leasehold Reform, Housing and Urban Development Act 1993. The Government has previously announced plans to enable all leaseholders with the right extend their lease to do so by 990 years, effectively removing the need to extend the lease again in the future.
This is not a new announcement, and it’s a change that is easy to make and is sensible. It will stop the need for multiple lease extensions, therefore avoiding costs which can be greater than the value of the lease itself.
Abolition of marriage value
It is likely the Government will take some steps to deliver on its commitment to abolish marriage value, for example, by banning marriage value for new leases, or setting a date in the future for such a ban to take effect. Any reforms are likely face challenges from freeholders and will probably focus on new leases going forwards rather than making retrospective alterations to existing leases, which would be legally problematic.
There are a few unresolved issues here. Most significantly, this would be a substantial transfer of wealth from freeholders to leaseholders. It is anticipated that landlords, as freeholders, would mount a challenge, and that the dispute could go on for many years.
Furthermore, people buying into leaseholds in the future will not benefit from this change – on the contrary, they will simply pay more upfront. This would be to the detriment of first-time buyers who may depend on buying a short-lease property to get a foot on the property ladder, and could potentially fuel house price inflation.
Changes to estate management charges
Unlike service charges for flats which are mostly well regulated, estate management charges are less controlled. This is because currently these are outside the controls set by the service charge legislation. Estate management charges can apply to freehold houses as well as flats on mixed developments. They are imposed via a ‘rent charge’ that attaches to the freehold land. It has long been mooted that these should be brought under the same controls so that the tests of ‘reasonableness’ imposed in relation to service charges for flats so that a dispute could be taken to the First Tier Tribunal.
ALEP’s members welcome leasehold reform: at our October conference, lawyers and property professionals polled said that they supported change: asked ‘In general, is the leasehold system in need of reform?’, 77.37% responded ‘yes’ – an increase on previous polling.
The government has stated its commitment to leasehold reform for several years and as the professional body for leasehold enfranchisement practitioners – surveyors, solicitors and barristers – we have been lobbying for, and supporting the government in bringing forward change, for many years.
However, we do caution that leasehold reform is complex, extensive and impacts on many more stakeholders than is immediately apparent. We would caution that the government consults widely and takes a considered approach to all aspects of potential reform, rather than rushing out unfinished or extemporaneous legislation that is not fit for purpose, and which could cause unintended confusion and harm – we do not wish to see a repeat of some of the issues that have arisen following the recent Building Safety Act.
Mark Chick is a partner and head of the landlord & tenant team at law firm Bishop & Sewell and a director and founder committee member of ALEP.