Is change finally afoot for residential landlords in 2023?

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09 Feb 2023

Is change finally afoot for residential landlords in 2023?

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Following a number of lengthy setbacks, we saw the first of the heralded changes in June 2022, with the introduction of The Leasehold Reform (Ground Rent) Act 2022, which restricted ground rents reserved in any residential lease to a peppercorn.

However, it is probably fair to say that this was not seen as the most seismic of the proposed reforms. So, what of the more significant changes, and could 2023 see their introduction?

What else is on the table?

Described as “the biggest shake-up of the private rented sector in 30 years” the proposed reforms are significant and will have a huge impact on landlords of prime residential property. The reforms recommended by the Law Commission cross a range of changes, including reducing the cost to claimants, broadening the scope of the collective freehold acquisition of buildings, making it easier for lease extensions, reducing the cost of enfranchisement claims and providing leaseholders a greater ability to claim the right to manage. The Government has issued a number of briefings and announcements in which it states that it intends to adopt several of the Law Commission’s recommendations. However, the timetable for the introduction of any of these measures remains unclear.

The reforms being discussed will bring about more rights and benefits to leaseholders, but with no guarantee as to what will be introduced, and, perhaps more significantly, no clear path as to when they might be introduced, those leaseholders minded to make an enfranchisement claim are left having to decide whether and when to make their claim. Similarly, the proposals present several challenges for landlords, but they are left unclear as to how they might prepare for the reforms, or whether there is anything they might do to mitigate against the potential impact on their residential property portfolios.

Enfranchisement uncertainties

One of the changes on which the position remains unclear concerns a proposal that the criteria for making a collective enfranchisement claim might be amended, such that the requirement that no more than 25% of the floor area of the property be in non-residential use be increased to 50%. When this suggestion appeared in the Law Commission’s report, it took most by surprise, because there had been no ostensible demand for such change. Indeed, the figures quoted by the Commission itself demonstrate that a majority of respondents to its consultation felt that there should be no change to this provision. Despite this, the Government has included this within its published list of proposed reforms, and yet there is no certainty it will be adopted. The Government commissioned yet another consultation on this issue, and the findings have yet to be published, with the most recent update simply being that the results are “being analysed”.

If the change were introduced, it is evident that more properties will be susceptible to a collective enfranchisement claim. With the number of potential enfranchisement claims likely to increase, and the possibility of premiums payable being reduced, the market may see a growing prevalence for “white knight” investors seeking to enable leaseholders to more easily make an enfranchisement claim by plugging any funding gap.

The likely timetable

Regrettably, in the absence of a crystal ball, we remain unclear as to when any of this might come to pass. With the government having to tackle a cost of living crisis, the effects of the war in Ukraine and the ongoing repercussions of Brexit and Covid, changes to how one makes an enfranchisement claim might seem low on the list of its priorities. Unsurprisingly, the subject did not feature amongst the prime minister’s recent fivepoint plan. Set against this background, and with long delays being perhaps the greatest feature of this legislative programme, one might be tempted to confine the matter to the long grass.

However, that appears short-sighted. While fundamental national concerns have necessarily slowed down progress, it is clear that the desire for reform remains. A briefing issued through the House of Commons Library on 22 December 2022 quite clearly restates the government’s aims to legislate in this field and refers to a Bill being included in the 2023/24 parliamentary session. This has been reinforced in an interview in January 2023 with the Secretary of State for Levelling Up, Housing and Communities in which he pledged to bring forward laws to scrap most “feudal” leaseholds in England “later this calendar year”, albeit that he acknowledged that “it is not easy in legal terms, when you’ve got a tangle of property laws going back hundreds of years”. It is clear from this that change is certainly on the horizon.

This article first appeared in Estates Gazette in February 2023.

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The Leasehold Reform (Ground Rent) Act 2022 (‘LRGRA')

The LRGRA came into force in June of last year and put an end to homeowner costs – known as ground rents – for new, qualifying long residential leasehold properties in England and Wales. The impetus for the Act was to prevent leaseholders from being obligated to pay onerous and escalating ground rents, with no evident servicing in return. A key aim was to combat the ambiguity and unfairness facing leaseholders.