Residential Reform for Landed Estates

The last five years have seen unprecedented changes in the way in which we live, work and socialise.  These changes, together with a busy agenda of statutory reform, including the proposals for a new Leasehold and Freehold Reform Bill, as outlined in today’s King’s Speech and the recent Renters Reform Bill, as well as other recent announcements and reforms will impact on the way in which residential property is held, managed and valued. 

Leasehold and Freehold Reform Bill
Leasehold reform has been on the agenda for reform for several years.  We have reviewed reports, recommendations, government announcements and promises for reform, but, until now we have not had any real certainty or detail as to what will, or will not, be introduced or amended.  Following the King’s Speech this week, we now have more detail as to the main areas for reform to be set out in a new Leasehold and Freehold Reform Bill and confirmation that the reforms to residential tenancies set out in the Renters Reform Bill will be progressed.  

Brief details of the newly announced Leasehold and Freehold Reform Bill are set out below:

• All new houses will be required to be sold as a freehold rather than leasehold interest, subject to what are referred to as “exceptional circumstances”.  The inference is that this provision will apply to only newly built houses, but this is not spelled out, and there is no indication as to what exceptional circumstances may be. 
• 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).
• Proposals to make it “cheaper and easier” for existing leaseholders in houses and flats to extend their lease or buy their freehold, whilst not spelling out in any clear terms what this may mean.
• An increase in the limit on the proportion of non-residential areas that may be present in the case of a collective freehold claim, from 25% to 50%.
• A consultation on a proposal to cap the ground rent payable under existing leases. 
• Provisions aimed at making the process of buying a leasehold property quicker and easier and improving consumer rights.

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. 

Neither reform is therefore likely to prove particularly controversial given that the current legislation already allows a selling tenant to assign the benefit of an extended lease claim to its buyer and it has always been possible for a qualifying tenant to make back-to-back 90-year extension claims.

The increase in the limit of the proportion of non-residential areas in a building which may be the subject of a collective freehold claim was not anticipated but has been mooted in previous government briefings. By raising the non-residential limit to 50%, a much greater number of buildings will be susceptible to a collective claim, and is therefore a change likely to prove far contentious amongst landlords.  Similarly, the announcement of the consultation on a proposal to cap the ground rent payable under existing leases looks set to provoke debate.

Renters Reform Bill
The introduction of the Renters Reform Bill in 2023 was described by Government as the “biggest shake-up of the private rental sector for 30 years”. The Bill reflects a desire to protect tenants against landlords perceived to be acting unreasonably or unfairly, following a period where there has been much focus on the poor condition of some rental properties and the use of “no fault” section 21 notices to end tenancies where a tenant complains about the condition of the property or rent increases.  

The headline reform is the abolition of section 21 notice evictions, meaning it will no longer be possible for a landlord to evict a tenant simply because it wants to do so, with eviction only possible if one of the statutory grounds can be proved. However, without considerable investment in the current court system, this will undoubtedly mean that it will be slower and more expensive for landlords to evict problem tenants, such as those with significant arrears or where there has been a significant breach of the tenancy. Landlords will be provided with more comprehensive statutory grounds to recover their property where tenants are at fault, but will only be able to evict in what is described as “reasonable circumstances”.

Another key reform is the introduction of a simplified residential tenancy structure where all tenancies will be continuous periodic tenancies, rather than coming to an end after a fixed period. This is a reform that will be welcomed by tenants wanting the security of a long-term home, with the ability to put down roots in the local community and school system, without the uncertainty of the current regime, but will make it significantly harder for landlords to retain possession of a property unless there is a tenant breach.
With more than 30% of all households in the UK currently owning a dog, it is perhaps not surprising that the reforms include the right for tenants to request the keeping of a pet at the premises. Landlords will be able to refuse consent to such a request if it is reasonable to do so. It is unclear quite what grounds may be argued here, presumably size (of property and pet) and breed will be taken into account. Landlords will be able to recover the cost of any damage caused by a permitted pet or require that pet insurance is put in place at the outset.

Reform is, however, still some way off. It is anticipated that the earliest the proposals outlined in the Bill could come into force is early 2024, following an acknowledgement from the Government that the current court system would not currently be able to cope with the anticipated increase in possession proceedings that will follow the implementation of the Act.  Whilst this may have led some to anticipate that the Bill had fallen to the wayside, the King’s Speech has brought the Bill back into play with the reform of the courts key to its implementation.  

Residential Reforms
The proposed changes outlined above come in the wake of significant change and reform over the previous few years adding gradually to the compliance steps and ongoing obligations that now form part of managing a residential letting. These include:
The introduction of the Tenancy Deposit Scheme, requiring all deposits to be registered and held under a statutory custodial or insurance backed scheme and the provision of the standard “How to Rent” guide before the start of the tenancy.

The implementation of the Tenant Fees Act restricting the sums that landlords may hold as a security deposit or charge as default payments under a tenancy.

The Right to Rent checks to be undertaken by landlords to ensure that all adults living in the property have legal status to live in the UK requiring checks to be made before the grant of the tenancy but also during the tenancy should that status change.
The combined requirements relating to gas safety, fire safety and electrical safety checks which require the provision of certificates prior to the grant of the tenancy and ongoing annual checks.

The provision of an Energy Performance Certificate of band E or above before letting or continuing to let a residential property.

Energy Efficiency
The introduction of the Minimum Energy Efficiency Standards (MEES) has led to significant expenditure for many landlords due to the requirement to ensure that all rental properties let, or to be let, on an assured shorthold tenancy have a valid Energy Performance Certificate (EPC) of band E or above.  Whilst limited exemptions are available, many landlords have undertaken significant works to improve the energy efficiency of their portfolio of properties mindful of the proposed tightening of the MEES requirements for new residential lettings to band C by 2025 and all residential lettings by 2028.  This requirement has now been scrapped and, whilst the current government has promised a “fundamental reform” to the current EPC regime, it is not clear at this stage quite what is intended.  
Aside from the MEES regime, increased consumer focus on the day-to-day cost of energy will however mean that properties with a good energy efficiency rating may attract a premium in the market.

Building Safety Act
The Building Safety Act (BSA) is a significant piece of legislation but will impact primarily on residential properties in urban estates comprising of multiple storeys and therefore considered higher risk.  Where applicable, the BSA has placed greater responsibility on landlords to deal with the remediation of historical defects.

Market Trends
One of the unforeseen, but significant, market trends in recent years has been the trend to “escape to the country” caused by the sudden and widespread increased flexibility in working practices resulting from the 2020 pandemic.  This new flexibility saw many opting to move further away from the workplace and take advantage of the ability to work remotely leading to a significant increase in both demand and rental values for rural properties.  However, we are now seeing the swing back to ‘normality’, with many renters now required to return to the workplace.  Notwithstanding this swing, there does still appear to be a lack of stock in the high-end rental market, perhaps because of the recent changes and anticipated changes to the residential letting statutory regime and the uncertainty caused by the mooted future reforms.
 

It remains to be seen if the reforms outlined above will proceed at the rate clearly envisaged by the government  and the next few months look set to be interesting for those dealing with residential properties and estates.

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