A year ago, the government announced its forthcoming plans to reform the future of homeownership in England and Wales, being noted as the “biggest reform to property law in a generation”. In recent months, there have been some moderate developments with The Leasehold Reform (Ground Rent) Bill and the Government opening a consultation, running for 6 weeks, on its latest and wide-ranging proposals to reform the leasehold and commonhold systems, although any significant reform is yet to be implemented.
The current system
Leasehold Minister, Lord Greenhalgh, has said that “the current leasehold system is outdated, unbalanced and broken and we are determined to fix it. Our proposals aim to rebalance power and should see more leaseholders than ever before owning the full rights to their homes”.
Leasehold is a form of homeownership that gives leaseholders the exclusive right to live in a property for a fixed number of years. Under the current system, where a lease has a remaining term which is close to falling below 80 years, it is recommended that a leaseholder opts to either extend their lease via a voluntary or statutory lease extension claim, or group together with other leaseholders in the building to collectively enfranchise, the process by which leaseholders come together to acquire the freehold of their building. Separately, leaseholders are also able to take control over the running of their building, in what is known as the ‘right to manage’.
What are the proposals?
The government have stated that their aim is to make it easier, and cheaper, for leaseholders of residential properties to purchase their freehold, extend their leases and access the ‘right to manage’.
Presently, only some residential leaseholders can opt to acquire their freehold through collectively enfranchising or take over management of their building through the ‘right to manage’. If shops and other non-residential properties make up over 25% of the total floor space, then the collective of leaseholders cannot exercise these claims. Under the proposals, the threshold of the ‘non-residential limit’ would increase to 50%, allowing leaseholders in buildings with up to 50% of non-residential floor space to claim for collective enfranchisement or a ‘right to manage’, bringing many more buildings within the scope of these regimes.
Other proposals consider the recommendations for leaseholders to require a landlord to take on leases for any non-participating units following a collective enfranchisement claim, making it cheaper for leaseholders to collectively purchase their freehold. A ‘leaseback’ refers to the existing practice in which leaseholders who collectively enfranchise can grant the previous landlord a lease of units within the building, for example over commercial units. Presently, this is an optional practice and the landlord can refuse it. By making these ‘leasebacks’ mandatory, leaseholders are able to reduce the cost of purchasing the freehold, as the units that are leased back by the landlord are not included within the final purchase price that leaseholders are required to pay, potentially making collective enfranchisement more affordable for leaseholders.
Once the remaining term of a lease falls below 80 years, the calculation of the premium (the amount payable to the freeholder by the leaseholder) for a lease extension or to purchase the freehold, will incorporate marriage value (the increase in the market value of the property arising from the extension of the lease). New proposals could see the cost of collective enfranchisement and lease extension claims reduced further with the abolition of marriage value, bringing premiums down. There are also recommendations for leaseholders to have the right to extend their lease by 990 years, rather than the current 90 years, with zero ground rent payable.
The Ground Rent Bill
The Leasehold Reform (Ground Rent) Bill was introduced to Parliament in May 2021 and has now received Royal Assent. Once the Act is implemented, ground rents in new residential long leases (one granted for a term of more than 21 years) will be reduced to zero, known as being capped at a ‘peppercorn’ rent (nil).
If a voluntary lease extension is granted outside of the statutory mechanism, a landlord can continue to charge ground rent for the remainder of the term of the original lease prior to its extension, however, only a peppercorn rent is payable for the extension period (i.e from the date of expiry of the term of the original lease). Where a leaseholder seeks a statutory lease extension of a flat or a house under either the Leasehold Reform, Housing and Urban Development Act 1993 or the Leasehold Reform Act 1967, those statutes already provide for a peppercorn ground rent to be payable from the date of completion of the extended lease, and so are excluded from the Act.
Although the Act is not retrospective, in that leases entered into before the Act comes into force can still demand ground rent uncapped, a landlord demanding ground rent under a lease pre-dating the Act should be cautious to not inadvertently vary a lease to the extent that it amounts to a surrender and a regrant. In this situation, the provisions of the Act would apply and ground rent would be capped at a peppercorn rent.
If ground rent is demanded in contravention of the legislation, and a breach occurs where a landlord does not return any payment to a leaseholder within 28 days of receipt, a leaseholder has a right to apply to the First-Tier Tribunal (Property Chamber), and there can be fines for non-compliance of up to £30,000 per qualifying lease.
What now?
Although it is apparent that residential leasehold reform is on the horizon, it is still unclear how and when this change is likely to take effect and it could be many years before significant reform is ever actually implemented.
If you are a leaseholder and your lease has a remaining term which is close to falling below 80 years, you should not hold off from extending your lease or collectively enfranchising in anticipation for this reform.
How can Jamieson Alexander Legal help?
If you require any assistance or advice on the ever changing landscape of leasehold law, or you would like to extend your lease or collectively purchase your freehold, please get in touch with either Ben Colenutt (ben@jamiesonalexander.co.uk) or Pippa Dungey (pippa@jamiesonalexander.co.uk) who would be more than happy to assist.