Leasehold reform: the options on the table

Given how long leasehold reform has been on the government agenda, there was a sense of occasion and anticipation as to what the King’s Speech in November would bring, particularly in relation to enfranchisement and residential leases.

While the King’s Speech itself was light on detail, we now have more information to digest in the form of the Leasehold and Freehold Reform Bill, the consultation Modern leasehold: restricting ground rent for existing leases and a commitment to progress the Renters (Reform) Bill.

Leasehold and Freehold Reform Bill

The government has promised “decisive action” to improve home ownership by the introduction of a number of measures making it “cheaper and easier for more leaseholders to extend their lease, buy their freehold and take over management of their building”. The Leasehold and Freehold Reform Bill, introduced on 27 November, sets out these measures in the form of significant amendments to existing legislation. Headline reforms in the Bill include:

• An increase in the standard lease extension term for houses and flats (from 90 years for flats and 50 years for houses) to 990 years on payment of a premium with the ground rent for the extended lease reduced to a peppercorn.
• The removal of the requirement to pay “marriage value” on lease extensions.
• The removal of the requirement for a new leaseholder to have owned their house or flat for two years before they can extend its lease.
• A significant increase in the current “non-residential” limit over which leaseholders in mixed-use buildings are prevented from buying their freehold or taking over management of their buildings from 25% to 50%, thereby increasing the number of properties susceptible to enfranchisement.

There may have been a collective sigh of relief from practitioners that the Bill contains no mention of the compulsory use of commonhold as an alternative to leasehold. The omission from the Bill of the much-heralded abolition of the use of leasehold tenure for the grant of new houses also prompted extensive comment. However, government has claimed that this was intentional, and that these provisions will follow as an amendment to the Bill at a later stage.

Modern leasehold: restricting ground rent for existing leases

Legislation is already in place to restrict freeholders from imposing ground rents in new residential leases. The King’s Speech included an intention to consult on plans to extend the restriction to include existing leases to ensure that “leaseholders are protected from making payments that require no service or benefit in return”. The consultation has been published, and sets out five options for reform, with responses due by 21 December. Each option (see box) would take retrospective effect to vary the terms agreed between the parties at the time of the grant of the lease. It is notable that “no change” is not an option. Indeed, Michael Gove has announced that he is “immovable” in his aim to “address these unregulated costs once and for all”. The wording of the consultation certainly tends to towards favouring option 1, in that this is the only option that would bring existing residential leases into line with new residential leases in seeing the abolition (rather than cap) of ground rents. It is also notable that the consultation does not envisage compensating freeholders for the loss of ground rent, notwithstanding that ground rents form a valuable income
stream for freeholder investors, including institutions and pension funds.

Renters (Reform) Bill

Finally, the King’s Speech put to rest speculation that the Renters (Reform) Bill may have fallen off the government agenda with the announcement that the government would deliver its manifesto commitment to abolish section 21 “no fault” evictions. There had been speculation as to the workability of an alternative court-based eviction procedure given the current delays experienced by those using the county courts, and it is reassuring to see that the government does not now intend to abolish section 21 until stronger possession grounds and a new court process is in place.

It is going to be a busy time for those tasked with digesting the various consultations. The obvious question is whether there is sufficient parliamentary time to see these measures pass into law before the next general election.

Options set out in the consultation*

Option 1: Capping ground rent at a peppercorn would see all ground rents reduced to zero and bring all existing residential leases in line with new residential leases but would mean the most significant financial impact for freeholders.
Option 2: Capping ground rent at an absolute minimum value would allow freeholders to continue to receive a ground rent subject to an upper financial value (an annual figure of £250 is suggested) regardless of the value of the property.
Option 3:  Capping ground rents at a percentage of the property value would also allow freeholders to continue to receive a ground rent subject in this case to a cap based on the value of the property (0.1% of the property value is suggested).
Option 4:  Capping ground rent at the amount when the lease was granted would also allow freeholders to continue to receive a ground rent at the initial agreed rate.
Option 5:  Freezing ground rent at current levels would also allow freeholders to continue to receive a ground rent, but at the higher current level where the ground rent has increased since the grant of the lease.
*The consultation is available here. 

This article was first published in EGi in December 2023.