Has the King’s Speech today provided some further guidance on leasehold reform? - Boodle Hatfield

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07 Nov 2023

Has the King’s Speech today provided some further guidance on leasehold reform?

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Simon Kerrigan View profile
7 min read

Those with an interest in Landlord and Tenant legislation generally, and enfranchisement in particular, will have approached the King’s Speech delivered today with a heightened sense of interest, and a hope for some clarification. In what has amounted to a stalemate built up over several years, we have been presented with reports, recommendations, Government announcements and promises for reform, with no certainty or detail as to what will, or will not, be introduced or amended.

Perhaps unsurprisingly, today was less than conclusive. The Speech itself was certainly far from enlightening, restricted simply to a statement that a Bill would be brought forward to make it “cheaper and easier for leaseholders to purchase their freehold”. Since then, by way of Government briefings, further detail has emerged.

On the one hand, the Speech provided some further guidance as to the areas on which the Government will apparently be focussing. On the other, as might always have been expected, we are light on detail and, as anyone who has had cause to grapple with this legislation can attest, the devil is certainly in the detail. The current law has developed over more than 50 years of statutes and caselaw, and contains enough grey areas, beartraps and loopholes to catch the unwary and to continue to provide ammunition for debate. Against that background, it is the detail that counts.

Nonetheless, today perhaps enlightens us as to the main areas on which the Government will focus. Here are the headlines:

  • All new houses must be sold with a freehold interest, rather than as a leasehold interest (subject to what are referred to as “exceptional circumstances”, but which are not specified)
  • The removal of the requirement that a tenant seeking an extended lease or the freehold must have owned his or her property for at least two years
  • Any new extended lease granted under the legislation should be for an additional term of 990 years (rather than an additional 90 years as is provided by the current legislation)
  • Making it cheaper and easier for existing leaseholders in houses and flats to extend their lease or buy their freehold
  • In the case of collective freehold claims, the increase in the limit on the proportion of non-residential areas from 25% to 50%
  • A consultation on a proposal to cap ground rent payable under an existing lease.

Some of these measures have been heralded for some time. 

The origins of the Government’s drive for leasehold reform can be traced back to the practices of certain developers, which included some selling new houses only by way of a leasehold interest and subject to such escalating rents that the price payable by a tenant later seeking to claim the freehold interest would be inflated so as to be unaffordable. Against that background, the requirement that any new house should be sold as a freehold interest might be expected. As to this proposed measure, there are still aspects that require clarification. The inference is that this is to apply to the sale of just newly built houses, but that is not spelled out, and there is nothing to explain what are the “exceptional circumstances” which might temper such a measure. Subject to those areas of clarification, it It is also worth noting that such change is likely to affect only a very small proportion of the property market.

The removal of the two-year ownership rule and the expansion of the extended lease term to 990 years were both included amongst options suggested by the Law Commission in their report on possible reform proposals. Neither is likely to prove controversial or particularly seismic. It has always been possible for a qualifying tenant to make back-to-back 90 year extension claims, so that one might engineer an eventual 990 year term through a succession of claims; the suggested reform just simplifies that process through it being achieved by way of a single claim. In addition, many extended lease claims arise upon the sale of a flat and the current legislation already allows a selling tenant to make an extended lease claim and to assign the benefit of that claim to the buyer (the buyer thereby securing an extended lease, notwithstanding the fact that he or she had not owned the flat for the preceding two years).

As mentioned, the only line delivered by the King himself on the subject of enfranchisement was to the effect that reform would be brought to make it “cheaper and easier” for leaseholders to purchase their freehold. That commitment is repeated (and expanded – to include reference to claims for extended leases) in the subsequent Government briefing. It is terminology that has consistently been used over the past few years. It has, on occasion, been accompanied by a stated intention to remove from the price payable for a freehold interest or extended lease the element of the valuation known as marriage value (the additional value released upon the merger of the tenant’s existing interest and the superior landlord’s interest). Perhaps that is what might yet be proposed, but without any further detail beyond a generic ambition to make the process “cheaper and easier”, it is a matter of guesswork and we are no closer to being able to confidently answer the commonly posed question “Should I make my enfranchisement claim now, or am I better holding off until reform of the law?”.

Ahead of the Speech, there had been some speculation as to what reform proposals might be included. Within such commentary, there had been little or no mention of any increase in the limit of the proportion of non-residential areas in a building which is the subject of a collective freehold claim. That has, though, been included in previous Government briefings and has been the topic of much discussion. In the case of a mixed-use buildings, currently the qualifying tenants of residential flats may collectively claim the freehold of that building if no more than 25% of the floor area is in non-residential use. By raising that limit to 50%, a much greater number of buildings will be susceptible to a collective claim. Set against the principle that a collective claim should apply only to buildings that are mainly residential in nature, and where there had previously been little, if any, call that the 25% limit should be altered (and where the Government has failed to respond to its own consultation on the subject), this change is likely to prove far more contentious amongst landlords.

In certain quarters of the press, there had recently been mooted the possibility that today’s announcements might include a requirement that all leases (even current leases) be at a peppercorn (ie. nil) rent, and that not only new houses, but also new flats, should not be sold as a leasehold interest. 

To those practising in this area, the absence of either of these measures is unsurprising, although that is qualified by reference to a consultation on capping existing ground rents. 

It is extremely difficult to fathom how one might remove, at a stroke, a tenant’s contractual obligation to pay (or, more pertinently, a landlord’s contractual right to receive) rent payable under an existing lease and then properly compensate a landlord for the loss of that value. Doing so, without a proper and comprehensive programme of compensation for such landlords would appear ripe for challenge under Human Rights legislation. In truth, the same challenge appears to be presented by any suggestion of capping existing ground rents where a landlord would equally lose rent he is contractually entitled to receive. Similarly, the Government has made much mention of replacing a “broken” leasehold system, but for the vast majority of the property market, that is simply not the case and there is no need to replace it. In the context of flats, the leasehold system has evolved over the last century to account for the respective rights, obligations and day-to-day management issues that affect a single unit within a larger building. Even if one were to do so, with what would one replace the current system? The Government’s reply appears to lie with a desire to move to a commonhold system, but there is no cogent, operative system currently in place and, whilst that may eventually come to pass, important, fundamental questions need to be addressed before that would be a sensible option.

A final word of warning. As mentioned earlier, all concerned in this area of the law have been seeking clarity and certainty for several years. However, those now looking to bring this wish list into force would be well advised to take their time in the drafting. If any of the proposed changes are rushed through without proper thought given in advance to the detail, and the potential consequences, of such measures, we will be in a much worse position, and possibly still without clarity or certainty. If one wanted a precedent for such confusion, one might look to recent experience with the Building Safety Act. 

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