“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.
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.
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:
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.
