We have all been awaiting some comment on what the King’s Speech May have in store. This article by Harry Yorke and Melissa York in the Sunday Times on 29th October sets out quite a lot of detail.

What is this all about ?

The Sunday Times today has article that sets out some predictions about the proposed reforms.

Given the government’s track record on putting things out by ‘official leak’ perhaps this is accurate?

The article by Harry Yorke and Melissa York seems to have access to some background information – mentioning that Mr Gove’s initial plans to ‘abolish leasehold’ were blocked by Downing Street as being ‘too radical’ but that a compromise has now been reached and that there are therefore plans in the offing.

If all of this is right, what do we have to look forward to? If the predictions in the article are correct, here are some highlights:

Capping ground rents

Plans to restrict ground rent to a more modest level; presumably by reference to a fraction of market value or a set sum? We can only speculate at this stage. But this would deliver on an earlier promise and as the article says would detract from the investment value of ground rents.

This would be a further step forward from banning ground rents for new leases as they have been under the Leasehold Reform Ground Rent Act 2022. This change would apply to existing leases.

According to the article plan the government plans to ‘run a consultation process [on] the issue within weeks, alongside the bill. It is expected to be one of the first pieces of legislation in the new parliamentary session before Christmas.’

If the source is correct, then it sounds like there is a plan for some immediate action.

Banning leasehold houses

This is an old chestnut and has been much promised, particularly in the early days of the leasehold scandal.

Ensuring that no house (properly so called) is leasehold will end any ground rent abuses; although there may be still limited circumstances in which this is necessary – but then only presumably when there is a ‘material overlap’ with other premises or a genuine need for a leasehold structure for service charge reasons.

In my view the other actions around ground rent and and the interventions of the CMA have effectively stopped the issue of escalating ground rents and leasehold houses. However, this was a ministerial promise and is therefore one that the government will want to deliver on and in drafting terms it is something of an isolated change and one that could therefore be made now, outside of any wider reforming legislation.

Making lease extensions 990 years long

This has been promised since Robert Jenrick first announced this when he was Housing Minister back on the 11th January 2021. It would be an easy change to make – thereby avoiding the need to extend ever again. Presuming that the statutory break rights are repeated at the term intervals and each 90 year term will mean consistency of estate management.

In valuation terms the difference in price will not be at all significant and this would be a big practical help to leaseholders.

Ending the two year rule

A very long time ago (well 15 years to be precise) when the the late Alex Greenslade and I drew up a shopping list of potential reforms to take to government on the part of the then newly formed ALEP – this was on top of the list.

In my view this is a common sense change that probably almost everyone can agree on and would be a simplification of both procedure and process, and a de-risking of the situation for buyers.

It would also harmonise the position as regards collective enfranchisement where you can participate from the ‘get go’ as a new owner and do not need to wait to be the registered owner for two years.

Anecdotally in practice I expect this deters a lot of people from joining in with collectives as they are under the mistaken assumption that they don’t qualify when in fact they do.

Reforming the law on RTM

The article says that the new law will also ‘extend the right to take control in multi-occupancy buildings.’ The suggestion may be that we are back to the question of whether the current position where the Right to Manage (RTM) cannot be exercised in relation to buildings where more than 25% is in non-residential use should be reformed.

There have been consultations about changing this threshold to 50%. There is also the issue as highlighted in ‘Settlers Court’ as to whether an RTM can take control of estate common parts outside the property. Currently this cannot be done, where there are shared areas. It is possible that this could also be up for a change so that perhaps the tribunal might be able to decide upon or share out responsibilities in such a case?

And finally, the big one: Banning marriage value

The article says that ‘ministers will now legislate to remove marriage value’ so that people with toxic ground rents can remortgage or sell their properties.

The article does not make clear if this will be as part of the same wave of legislation that is promised or at a later date. However, this is the ‘big ticket item’ and the one thing that would change things significantly for leases that are under 80 years.

Comment

The government has a game of ‘catch up’ to play, having made a lot of promises and now needing to deliver on these.

If these changes are announced then this will go some way towards delivering on these – but the article doesn’t mention what a lot of people have said could be a big issue around banning ground rents – which is the possibility of a human rights act challenge. The context of all of the valuation changes will have to be looked at carefully once the nature and scope of these are known.

The general thinking has been that the reforms on valuation would be better set in the context of a much wider and broader reforming piece of legislation, but it may be in fact that this is what the government has planned.

So, are the above predictions entirely accurate ? We will have to wait till Tuesday 7th November to find out.

Mark Chick

29th October 2023

A look at the recent reform agenda

A short history of the recent reform agenda

The big topic on everyone’s lips at the moment is the King’s speech set for 7th November 2023, and the question that we all want to know the answer to is ‘will there be any kind of announcement about leasehold, and if so, what sort?’

Of course, we will have to wait until then to hear the news, but I thought in the meantime it might be helpful to take stock of where we have been and also to think about how the concept of ‘leasehold reform’ has been brewing over time.

The reform agenda stretches right back 56 years or so to the Leasehold Reform Act 1967 and the question of reform has been around prior to that and there are some good (political) words around this on the blog site of my late friend Louie Burns see:

https://barcode1966.wordpress.com/2018/09/14/the-shameful-history-of-leasehold-reform/

A political story

This is very much a political story, and we are about to stray into political territory. The Law Commission recognised that when they looked at this and indicated that on valuation matters, particularly, they could only look at options for reform – to be discussed and voted on by parliament.

We cannot say with certainty what the government will deliver as it moves from the end of this year into next, when there very certainly will be an election. The parties have all considered leasehold in slightly different ways over the years. However, I am pleased to say, that there is a renewed focus now.

In the light of this I thought that it might be useful to have a look at what has gone on in the recent past as part of setting the scene for a discussion about what is likely to mentioned on the topic of reform and if (for some reason) it is not mentioned then to look very closely at what perhaps should feature in any government’s future list of changes in this sector.

The Potential Reforms in Leasehold

There have been numerous reforms, and a great deal of talk about future changes, in the years since the Government announced that it was going to tackle the thorny and complex question of reforming leasehold ownership.

Recent History

On 21 December 2017, then Housing Secretary Sajid Javid announced the Government’s plans to tackle perceived problems with the leasehold system in England and Wales, following on from the exposure of the so-called ground rent and leasehold houses ‘scandals.’

Leasehold reform was subsequently included in the Law Commission’s 13th Programme of Law Reform, which was tasked with finding ways to fulfil the Government’s intent to make buying a freehold or extending a lease “easier, faster, fairer and cheaper.”

The Law Commission’s work

After numerous consultations, the Law Commission published a series of reports on 21 July 2020:

· A final report on reforming all aspects of leasehold enfranchisement entitled: Leasehold homeownership: buying your freehold or extending your lease
· A final report on Right to Manage: Leasehold home ownership: exercising the Right to Manage
· A final report on Commonhold entitled: Reinvigorating commonhold: the alternative to leasehold ownership

In January 2021 the Government announced legislation would be introduced to set future ground rents to zero as the first part of a two-phased approach to reforming leasehold. The Leasehold Reform (Ground Rent) Act 2022 (‘the Ground Rent Act’) came into force on 30 June 2022 and applies to new lease agreements created on or after that date.

The Ground Rent Act puts an end to ground rents for all new long residential leasehold properties in England and Wales and limits on renewals to the rent that would be paid under the existing lease until the old term comes to an end.

The Act came into force for most new leases on 30 June 2022 (and from 1 April 2023 for leases of retirement homes), abolishing ground rents on all new long leases of flats and houses so that only a peppercorn rent (i.e. zero) can be payable under the terms of the new leases. The legislation does not apply retrospectively, and so long leases entered into prior to the 30 June 2022 are still subject to pay ground rent.

Future reforms

On 11 January 2021 the Secretary of State (then Robert Jenrick) provided additional information on planned reforms in a written ministerial statement. In summary, future legislation will look to address the following points, as part of the second phase of the leasehold reform agenda:

· Reform the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold.
· Abolish marriage value.
· Cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. An online calculator will simplify and standardise the process of enfranchisement.
· Keep existing discounts for improvements made by leaseholders and security of tenure.
· Retain the separate valuation methodology for low-value properties known as “section 9(1)”.
· Give leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”.
· Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue, “subject to existing safeguards and compensation”.
· Enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.

The Building Safety Act, which became law on 28 April 2022, also ushered in additional protections for leaseholders in the wake of the Grenfell Tower tragedy, among them new legislation jettisoning the notion that leaseholders should be the first port of call to pay for historical safety defects, including unsafe cladding, through the service charge.

Timescales

Since then, there has been insufficient parliamentary time to allow the Government to bring forward proposed legislation to address its aims for the second phase of leasehold reform.

On 20 February 2023 Michael Gove, Secretary of State at the Department for Levelling Up, Housing and Communities announced: “We hope, in the forthcoming King’s Speech, to introduce legislation to fundamentally reform the system. Leaseholders, not just in this case but in so many other cases, are held to ransom by freeholders. We need to end this feudal form of tenure and ensure individuals have the right to enjoy their own property fully.”

On Sophie Ridge on Sunday on 29th January 2023 Mr Gove said that he ‘wanted to introduce legislation in the final parliamentary session- later this calendar year to change the leasehold system.’ He went on to describe leasehold as ‘an outdated and feudal system that needs to go.’

Mr Gove seems to have been suggested that leasehold could be abolished altogether, although this appears to have been something of a red herring, while Labour has also claimed it supports the abolition of leasehold ownership.

What happens next?

Everyone will be eagerly awaiting clarity from the Government on what the next tranche of reform legislation will look like.

While the King’s Speech on 7 November will surely include mention of the Government’s future intent, in practise the detailed proposals themselves may not be worked up by the time of the next General Election.

However, regardless of which party forms the next Government the likelihood is that the outcome of the election will not derail the impetus that has built up behind leasehold reform.

The policies themselves and the social aims of the Government of the day will of course have an impact on the trajectory of leasehold reform, and so leaseholders and the practitioners advising them will likely have to wait a little longer before we get a clear sense of how the reform agenda will shape up.

Mark Chick
28th October 2023

The proposed amendment to Section 119 of the Building Safety Act 2022

The Building Safety Act 2022 (‘BSA’) brings in sweeping changes and seeks to provide leaseholders with protection against service charge costs relating to remedial work concerning building safety.

 

In particular, the BSA seeks to provide qualifying leaseholders with protection against service charge costs relating to remedial work concerning building safety for buildings which are over 11m high or that have five or more storeys. 

 

These protections are set out in Schedule 8 to the BSA and the governing section that defines what a qualifying lease will be for the purpose of this protection is Section 119. 

So what is The issue with Section 119 and lease renewals?

 

Unfortunately, there is a known issue with Section 119 and the way that it has been drafted.

 

The Section defines a qualifying lease as being one that was ‘granted before 14th February 2022.’

This time limited definition means that any renewal of the lease will lose the protections that the leaseholder would otherwise have, as to state the obvious the new lease will be granted after 14thFebruary 2022,

 

The government knows this is an issue – after ALEP wrote to them pointing this out in April 2023 and they have indicated that the government would seek to fix this problem ‘as soon as parliamentary time allows.’ 

 

Where are we on getting a solution?

 

The government response has been that we will fix this ‘as soon as parliamentary time allows.’ 

 

Wind forward to the 18th September 2023 and in the Lords debate on the Levelling-up, Housing and Regeneration Bill an amendment is proposed to the BSA to ‘fix’ Section 119. (Amendments 242 and 243 of Bill 369 2022-23 (Lords Amendments)) 

 

This amendment was proposed by Lord Young and voted against by the government, but they lost the vote and so this amendment now returns to the Commons on 17th October 2023 for the third and final reading of the bill. 

 

If accepted this amendment will be passed into law, however, a number of observers have raised concerns about the proposed wording and it is perhaps likely that a further amendment will be proposed and the bill returned to the Lords. If there is a risk of ‘ping pong’ between the Commons and the Lords and if agreement cannot be reached then the possibility of the government using the Parliament Act to overrule the Lords. 

 

It is likely that the government will propose an alternative amendment and it has to be hoped that if so, any such amendment will deal once and for all comprehensively with the issue that has been created by the original drafting of Section 119 of the BSA. 

So, what is wrong with the proposed BSA amendment?

 

The text of the proposed amendment appears below: 

 

Clause 119A

 

“Qualifying leases under the Building Safety Act 2022

 

After section 119 of the Building Safety Act 2022 (meaning of “qualifying lease” and “the qualifying time”), insert-

 

(1) A qualifying lease varied or subject to any surrender and regrant, remains a qualifying lease.

(2) This section has effect in relation to any qualifying lease varied, or subject to any surrender and regrant, before the coming into effect of this section.

(3) Any agreement contrary to this section is void, whether made before or after the coming into force of this section.”

 

Let’s look at this wording in a bit more detail: 

 

Surrender and regrant

 

So, here’s the possible problem: ‘a qualifying lease subject to any surrender and regrant.’ 

 

Firstly, leases that are granted under the Leasehold Reform Housing and Urban Development Act 1993 (‘the 1993 Act’) are, ‘granted in substitution for the existing lease’– that is not strictly a ‘surrender and a regrant’ of the existing lease, but rather the surrender of the old lease and the grant of a new lease in substitution for the old one in accordance with Section 56(1) (a) of the 1993 Act.

 

That being the case the wording also does not appear to catch brand new leases – either entirely new leases or leases granted in replacement of other previous leases of the same premises that would have been qualifying leases as at 14.2.2022. 

 

The choice of words ‘’surrender and regrant” has more of the meaning attaching to the deemed surrender and regrant of intermediate leases under section 58A of the 1993 Act. 

 

Other types of lease – eg. Overriding leases

 

And what about overriding leases? – these are often granted to flat owners (and sometimes to investors), where a collective enfranchisement has taken place, on the basis that they are generally a much more tax efficient way of dealing with a post completion lease extension and a way in which the nominee purchaser can grant lease that can be granted without mortgagee involvement if the leaseholder’s flat has a mortgage on it. 

 

In such a case the building may cease to be a qualifying building – if a collective has bought the freehold. There are still relevant BSA protections that the leaseholder may wish to take advantage of. 

So, what happens next?

 

Whilst the fact that an amendment has been approved is entirely laudable, what is potentially quite concerning is what would happen were an incomplete solution passed into law. That would create further confusion and uncertainty for those affected by this.

 

The one positive in the drafting is the provision for retrospective effect which surely has to be a part of any eventual solution. Retrospective legislation requires special parliamentary drafting approval but this is likely to be essential to remove uncertainty and resolve many current outstanding cases where parties are arguing for catch all clauses regardless of whether these may be effective or not. There is of course an ongoing question for practitioners seeking to agree clauses as to whether you can in fact ‘draft around’ a statute. 

 

So, whilst this is encouraging further work needs to be done to resolve this issue with the certainty that is needed. ALEP and other interested parties are keen to see that whatever fix is applied to this problem is done quickly and effectively. The ongoing uncertainty is of no advantage at all to either leaseholders or freeholders. 

 

We therefore eagerly await the debate on this on 17th October 2023 to see whether some certainty can finally be brough to bear on this issue. 

 

Mark Chick

10.10.2023