“My Ministers will bring forward a bill to reform the housing market by making it cheaper and easier for leaseholders to purchase their freehold and tackling the exploitation of millions of homeowners through punitive service charges.”
We have from the King’s Speech on 7th November 2023 that there will be a bill to ‘reform the housing market and to make it cheaper and easier for leaseholders to purchase their freehold and to protect leaseholders form punitive service charges.’
So, what does all this mean?
A number of the predictions previously mentioned have ‘come true’ …
990-year lease extensions
We have the confirmation that lease extensions will be increased from 90 to 990 years with a zero ground rent.
No more 2-year ownership rule
We have confirmation of the removal of the requirement to have owned a property for at least two years before seeking a lease extension.
Changing the limit for mixed use buildings to 50%
The new bill will seek to increase the 25% threshold for mixed-use property to 50% so that property with that is up to 50% non-residential will now qualify for the right to enfranchise and the right to manage.
Banning leasehold houses
The long-promised ban on the creation of new leasehold houses ‘save in exceptional circumstances’ – this is not that much of a surprise.
And now the big one ..
Making it cheaper and easier for leaseholders to extend their lease or buy their freehold
What is not entirely clear is how the detail of ‘making it cheaper and easier’ will work in practice
The notes accompanying the speech state it will be made ‘cheaper and easier’ – the exact words given to the Law Commission in their terms of reference.
There is the mention of the consultation on capping ground rents – which if it were to become law would make it cheaper as presumably there would be a follow through into valuation calculations of the rent actually collectable rather than as written into the lease.
Banning marriage value
What is not said directly in the notes, but can be inferred and was confirmed by the Minister of State for Housing and Planning, Rachel Maclean MP at the APPG meeting on 7th November is a commitment to ban marriage value.
A worked example is given at the end of the more detailed government notes accompanying the speech (page 47) and these appear to indicate that the cost of a £16,000 lease extension at 76 years would decrease to £9,000.
How this is to be achieved in practice is not spelt out, but it sounds like the removal of marriage value as this is the only likely factor that could give rise to this change. The note says that the leaseholder would pay only the reduced premium amount plus their own costs.’ Is there is a suggestion therefore that landlords may also be prevented from recovering their costs?
It is not clear therefore whether the plan to ban marriage value sits within this proposed bill, or whether this would be dealt with as part of a wider programme of reforming legislation.
Without any further detail or a draft bill at this stage, we can only guess at what the detail of this will mean.
All eyes will be on parliament on 7th November for the Kings Speech and the detail on leasehold reform
The King’s Speech on 7 November is highly anticipated by all those involved in the leasehold sector.
The first phase of reforms have ushered in a number of changes to help leaseholders in the wake of the ground rent and leasehold house ‘scandals,’ with the Government having committed to make buying a freehold or extending a lease “easier, faster, fairer and cheaper.
As we now look ahead to what the second phase of reforms might entail, a wide range of possible changes have been mooted.
The Act put an end to ground rents for most new long residential leasehold properties in England and Wales. The Act came into force for most new leases on 30 June 2022 and from 1 April 2023 for leases of retirement homes.
From 30 June 2022, landlords of regulated leases (basically all new leases) must not require a leaseholder to make a payment of ‘prohibited rent’ (usually a ground rent). The only exceptions are if a lease is renewed by agreement – then the ground rent can remain the same as it was during what would have been the old lease term – but cannot continue into any new or extended part of the lease term.
The state to come (possibly)?
The Government has made numerous statements since the Law Commission published its reports in July 2020, which give some strong cues as to the likely direction of travel for leasehold reform. A ministerial statement by then Housing secretary Robert Jenrick in January 2021 briefly set of thedesired scope for the second phase, including changes to valuation, a cap on ground rents, and potential abolition of marriage value.
It seems likely therefore that the next round of reforms will predominantly focus on two things; increasing and improving take up rights and making some simple adjustments to make it ‘cheaper and easier’ to enfranchise, including changes to the valuation method.
What we now have by way of ‘news’ is a very informative article published in the Sunday Times on 29th October 2023 and backed up by several other media sources, indicating what the scope of the first phase of the reforms might be.
Changing the threshold?
One suggestion was that the threshold for RTM claims might be changed so that the right to manage would apply to a building where more than 25% is used for non-residential purposes. There has been discussion about raising the threshold to 50%. It now seems that this may be on the cards.
That then begs the question – although not mentioned in the pre-King’s Speech ‘release’ of information – as to whether the government might also be proposing to reform the 25% rule for collective enfranchisement.
Currently, if more than 25% of the internal floor area of the building, excluding any common parts, is neither used or intended to be used for residential purposes then the building will not qualify. By increasing this threshold to 50%, with mandatory leasebacks included, it will enable ‘many more people to enfranchise.’ There was a previous consultation on this by DLUHC and therefore this could also be ‘on the cards.’
If this were to be done then it would certainly improve access to enfranchisement and also make it ‘cheaper and easier.’
990 year lease extensions
I would also expect the promise of a ‘short amendment’ to ensure that statutory lease extensions are to be for 990-year terms, with the attendant amendments to the valuation and other schedules that this will require. This could be dealt with in ‘isolation’ and would deliver on a previous ministerial promise. It would also be an easy change to make – thereby avoiding the need to extend ever again.
Increasing the statutory lease extension to 990-years would ensure no need to repeat the exercise for ‘shorter’ leases where (absent a reform on the commencement of marriage value at 80 years) there may be a need to extend again in the next few years in circumstances where a lease was renewed on a voluntary basis for 99 or 125 years. In valuation terms the difference in price will not be at all significant and this would be a big practical help to leaseholders.
Ending marriage value
The second proposed change that I think we will see some movement on will be to deliver in some way on the commitment to ‘abolish marriage value’. The recent article in the Sunday Times (29 October 2023) stated that ‘ministers will now legislate to remove marriage value’ so that people with toxic ground rents can re-mortgage or sell their properties. This is the ‘big ticket item’ and the one thing that would change things significantly for leases that are under 80 years.
A wider programme of reform?
I do not feel that this is likely to be proposed in isolation because of the inherent risk of a lack of balance if other valuation reforms are not introduced at the same time.
This is also potentially vulnerable to a Human Rights Act challenge, as freeholders will not be enthused by reforms to the valuation system that will reduce the value of their assets. The context of all the valuation changes will have to be looked at carefully once the nature and scope of these are known.
Consulting on capping ground rents
There is also the promise of a consultation on capping ground rents and whilst there is no detail as of yet, that begs the question that if ground rents are to be capped (say at a fraction of market value), then what will the knock-on effect into valuation be?
Most likely this will clearly reduce compensation quite significantly if the actual rent collectable is used rather than any rent written into the lease, particularly where this is escalating or outstrips whatever cap is to be imposed.
Wider reforms
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 that this is exactly what the Government has planned.
Therefore, it is possible we will see a manifesto commitment to reform the law on valuation so as to abolish marriage value as part of a wider package of valuation reform. We might see a ‘Valuation Reform Council’ set up – a bit like the Commonhold Council – also most likely packed with representatives that strongly support a pro-change agenda. My feeling is that this could be announced so as to come into effect before the next election.
Valuation reform – my prediction
My prediction is that wider valuation reform and ‘reform’ more generally would come further down the line. There might also be a manifesto commitment to introduce a ‘grand reform bill’ ‘abolishing’ leasehold during the next parliament. However, there are massive issues thrown up by the scale of what would be involved in wholesale reform, which would be the ‘best’ and most comprehensive solution. Any reforming act would be an enormous undertaking and would take up a large tract of parliamentary time.
Other details key to a reform agenda – the introduction of Commonhold
What the detail of any potential abolition legislation might be would of course ‘remain to be seen’ and mandating Commonhold would almost certainly be part of this. That would mean ensuring that Commonhold is ‘fit for purpose’ and therefore also accelerating the programme of work around this.
Abolishing leasehold ? Not in one go
Replacing the existing system with something totally new overnight isn’t legally or physically possible. Instead, it is more likely the Government would set a ‘sunset clause’ for all new leaseholds, but only once Commonhold has been made fit for purpose.
When might that be? Well, that all depends on when Commonhold is made fit for purpose – and that, in my estimation, is three to five years away at the earliest. I look forward to seeing what the government will propose on this – as to bring about meaningful and lasting change this will be essential.
