Leasehold reform – it's been much talked about for the past four years, but little action has been seen other than the enactment of the Leasehold Reform (Ground Rent) Act 2022. This limited the ground rent chargeable on most long residential leases granted after 30 June 2022 (or 1 April 2023 for retirement homes) to a peppercorn per year, effectively restricting ground rents to zero financial value.
So it's not surprising that many ears in the leasehold sector were keenly listening to the King's Speech on 7 November 2023 to learn about what additional leasehold reform measures this Government has in the pipeline. You would have been forgiven for missing the couple of sentences on leasehold reform in the speech itself, but the briefing notes published shortly thereafter contained more details. There are lots of proposals which amount to tinkering with the leasehold system, many of which we have seen before (see our previous blog posts below). The main highlights, to be included in a new Leasehold and Freehold Reform Bill, are as follows with our views on what you need to know set out below:
- making it cheaper and easier for existing leaseholders in houses and flats to extend their lease or buy their freehold;
- increasing the standard lease extension term from 90 years to 990 years for both houses and flats, with ground rent reduced to £0;
- removing the requirement for a new leaseholder to have owned their house or flat for two years before they can benefit from these changes;
- banning the creation of new leasehold houses;
- improving leaseholders' consumer rights; and
- increasing the 25% 'non-residential' limit to up to 50%, to enable leaseholders in mixed-use buildings to buy their freehold or take over management of the building.
What is relatively new is the announcement of a consultation on caps for existing ground rent provisions (ie those in leases granted before 30 June 2022). Our views on the main highlights are as follows.
Making it cheaper and easier for existing leaseholders in houses and flats to extend their lease or buy their freehold
It is not clear how valuation mechanisms will change to enable tenants to pay less for a lease extension. The devil will be in the unpublished detail. Given that the current basis of valuation is to allow landlords to receive roughly the market value of what they are losing, this would seem to suggest a change which is designed specifically to undercompensate landlord investors for what they will lose. That kind of move is consistent with the current chatter in the realm of compulsory purchase where owners whose land is taken may in the future find themselves not compensated for perhaps considerable hope value.
Increasing the standard lease extension term from 90 years to 990 years for both houses and flats
The extension period of 990 years is not news, having been out for discussion for nearly three years. It is also at the least radical end of the spectrum of possible reform. Commonhold, the already existing, but almost completely unused, alternative to leasehold ownership has been on the statute books since 2002 but suddenly came back into vogue in 2019 as part of the Parliamentary Committee's report on what to do about leaseholds. But this former darling of reform is entirely unmentioned in the King's Speech.
Increasing the 25% "non-residential" limit to 50%
The physical shape of mixed-use schemes nowadays is dictated by reference to the 25% cap on non-residential parts, so that landlords can be clear that they retain their income and control over the whole scheme by ensuring that the commercial element is more than 25% of the floor area. If that percentage increases to 50%, this may cause changes in the makeup of future developments so that landlords include larger commercial parts, which has a knock-on effect on housing supply. For existing developments, landlords could be unexpectedly left exposed to possible acquisition of everything by their residential tenants. But tenants should also be careful what they wish for, as they will need to pay the price for acquiring property with profitable commercial elements. As a collective group of flat owners, they would then find themselves in the shoes of a commercial landlord with oversight of the whole estate and the statutory obligations that come with that.
Consultation on caps for existing ground rent provisions
Following the ban on ground rents for new leasehold transactions in June 2022, the proposed consultation on banning existing ground rents is necessary to address the two-tier system that is developing in leasehold property. An uncapped ground rent is obviously less attractive to a buyer than a property with zero rent. However, again, the statutory removal of a right for a landlord to receive an annual income that the tenant already contracted to pay, for perhaps another hundred years, is falling into the realms of sequestration. This is a particularly important point for investor landlords who may have bought up ground rent portfolios to provide an income stream. There is no mention of compensation in return, either from the tenant or from Government. Presumably the tenant would have paid more at the outset had there been no ground rent to pay on top, so the landlord will have lost out one way or another. It is a tricky issue to balance so it will be interesting to see what comes out of the consultation in due course.
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