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

https://www.theguardian.com/money/2023/may/10/plans-abolish-feudal-leasehold-system-england-wales

So it seems that leasehold won’t be abolished in this parliament – although many of us will have thought that this wouldn’t happen what we do have is the idea that there will be something from Mr Gove next month

As the article says ‘the measures are expected to include a cap on ground rents, more powers for tenants to choose their own property management companies and a ban on building owners forcing leaseholders to pay any legal costs incurred as part of a dispute’ – exactly what that means in practice remains to be seen

We have been wondering when the next phase of leasehold reform will be coming ….

Well now we have some news.

In a carefully worded letter from the Minister Lord Greenhalgh addressed to me in my ALEP capacity, he states that Government intends to press ahead with the plans previously announced to ban marriage value and to ‘simplify’ the basis of the valuation calculations (including the introduction of an online calculator) in the next session of this Parliament.

I take this to mean that legislation will be tabled to do this in the next and final session of this Parliament in the run up to the next (scheduled) election in May 2024.

These proposals also include the previously stated promise to increase the length of a statutory lease extension to 990 years. Of these proposals the scope for valuation reform is going to be contentious, proposing as it does a shift of values from freeholders to leaseholders. The letter anticipates the prospect of a Human Rights Act challenge, and I wouldn’t be the first commentator to suggest that this might well be the case, given that the options given by government to the Law Commission on this topic were the most political terms of reference they had ever received.

But there we have it, a timetable at last as to when the proposals first announced on 7th January 2021 are to be the subject of some draft legislation.

Mark Chick

27th June 2022

The 2022 Act comes into force on 30th June 2022 and bans ground rent for most types of new leases – So, what will this mean in practice?

Is the Act in force yet?

The Leasehold Reform (Ground Rent) Act 2022 received Royal Assent on 8^th February 2022 and will come into force on 30^th June 2022.

There is a carve out for the retirement sector who have until April 2023 to get used to the idea of leases without ground rents on the basis that in some retirement developments a ground rent is used to suppress the maintenance costs and reduce the service charge.

If I buy a new flat once the Act is in force, will I pay a ground rent?

There will be no ground rent for brand new leases (e.g. new build leases of flats and houses).

The one short term exception is where a contract to grant the lease was granted before the Act comes into force. We might expect therefore to see some completely new leases validly granted with a ground rent for a little while after commencement, but only under this exception.

Once in force the Act will effectively ban ground rent for all brand-new leases, but otherwise any lease of a newly built flat or house will have to be at a zero rent.

The Act also contains deeming provisions so that even if a new lease is drafted with a ground rent that applies during what is called the ‘prohibited period’ (essentially the extended term of any new lease) that the rent will be deemed to be zero, even if the lease says otherwise.

Are there any situations when can a lease still include a ground rent after the Act comes into force?

Yes, and this where the lease is a voluntary renewal of an old lease.

Where the new lease is a voluntary renewal of an existing lease, there can be a ground rent, but this can only continue at the old level if ground rent and then, only during what would have been the remaining term of the old lease.

The detail on this is set out in Section 6 of the Act.

This will have a big impact on those freeholders who like to keep a ground rent on any voluntary extension of a new lease and will drive up the cost of voluntary renewals.

A worked example of how this might work in practice is as follows:

If a lease has a term of 99 years from 1980 and expires 2079, and a deal is done to extend that lease by another 100 years so that it runs out in 2179, then the new lease can keep the old ground rent (whatever that was) until 2079, but after that any new rent must be zero.

The old rent cannot be increased and must remain exactly as it was under the old lease.

What about other types of lease extension?

Any extension under statute will be at a zero rent in any event, as this is what the 1993 Act prescribes and the Act makes plain that this type of extension is a ‘permitted extension’.

There are exemptions for ‘Islamic finance’ type arrangements and also ‘shared ownership’ leases under which the tenant’s proportion must be at zero rent but that the landlord / housing provider may charge whatever rent they would normally charge in respect of the rental element.

What if a landlord does not comply with the Act once it is in force?

The Act is quite specific that the local authority weights and measures department has responsibility for enforcement and that fines can be imposed. The minimum fine is £500 and the maximum £30,000.

In addition, if a ground rent is collected when it should not be once the Act is in force then the rent must be repaid to the leaseholder with interest. An example would be if a new lease is erroneously granted with a rent provision in the extended lease term – or at a rent that exceeds the old rent.

What is the impact of the Act likely to be?

In an earlier version, the Act included an obligation to inform the tenant about the existence of the Act and its provisions. These provisions did not make it into the final version of the Act

However, the very existence of the Act itself, once in force, will surely push more leaseholders to ask for a lease at a zero rent on extension and / or go down the route of a statutory extension if this is not offered.

All this means that the writing really is on the wall for ground rent.

Some other thoughts about the Act and further possible leasehold reforms

Once in force, this Act will be a big step forward towards the Government’s proposed agenda for change in this area.

Ending ground rent for newly built leasehold flats and houses will go a long way towards avoiding any repeat of the so called ‘leasehold scandal’ where doubling of ground rents on newly created leases created an iniquitous situation for homeowners who had been sold leasehold houses with an escalating ground rent.

However, this Act does not deal with the banning of the use leasehold on an ‘unnecessary’ basis as a tenure for houses, as was originally promised by the then housing minister Sajid Javid. That question together with the prospect of wider reform is still ‘in discussion’ and it remains to be seen how and when such further changes will be acted upon by the Government.

This is of course all part of a wider programme to make leasehold unattractive for new properties and eventually, to pave the way for commonhold for new properties.

Although the new law will abolish ground rents on new build leases and during any extended lease term, it does not affect existing leaseholders.

Leaseholders who face high ground rents and want to get rid of them will still need to follow the statutory leasehold enfranchisement process.

I look forward to seeing what the further detail of the Government’s plans will be on the topic of broader leasehold reform.

The Queen’s Speech on 10^th May 2022, did not set out any specific plans for any new Acts on this topic, but simply re-stated the Government’s general commitments to the reforms. As to the timing of any further legislation we will have to wait and see, but there is no immediate indication of anything forthcoming in the current session of Parliament, although that does not mean that there might not be something forthcoming… as ever, we will have to wait and see.

Mark Chick