Now this really is a piece of leasehold reform news.

The Leasehold Reform (Ground Rent) Bill received the Royal Assent on 8th February 2022, making it an Act of Parliament.

Is it in force? – no not yet

The new Act, (which is not in force yet) will apply to leasehold properties in England and Wales. It will restrict ground rent owed on new leases to a ‘peppercorn’ rent – effectively zero – and aims to make leasehold ownership “fairer and more affordable”.

When will the new act come into force?

The accompanying DLUHC press release gives a commitment to bring the main provisions of the Act into force within 6 months, in other words by 8th August of this year.

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 (eg. New builds)

The one short term exception will be where a contract to grant the lease was granted before the Act comes into force. We might expect therefore to see some 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.

In other words, 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 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.

So, when a lease can have a ground rent? – On renewal by agreement – but only in the old lease term

Section 6 of the Act permits a new lease that is granted by way of renewal or extension on a voluntary basis to keep a ground rent but then only during the old lease term and at the old rent.

This will have a big impact on those freeholders who like to keep a ground rent on any voluntary extension of a new lease. All that will be permitted now is to keep the old ground rent (whatever this was) until the date on which the old lease term would have expired.

What does this mean in practice?

To give an example: if a lease has a term of 99 years from 1980 and expires 2079, then if 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.

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

What about other extensions?

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 doesn’t comply?

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 shouldn’t 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 will be the impact of the Act?

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 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.

Commentary

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 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 governments plans will be on the topic of broader leasehold reform, which we may expect later in this Parliament.

Mark Chick

21.2.2022

A change to the threshold for non-residential premises in enfranchisement and the prospect of mandatory leasebacks – Both in consultation as of 11th January 2022.

Following on from the Law Commission’s work on this and hot on the heels of last January’s announcement that MHCLG (now DLUHC) was looking to consult on the proposed reforms to make it ‘cheaper and easier’ to enfranchise we now have a new consultation – closing 22nd February 2022.

The consultation seeks views on the following proposals:

• The non-residential limit for collective enfranchisement;

• The non-residential limit for right to manage claims;

• A non-residential limit for individual freehold acquisitions;

• The introduction of mandatory leasebacks as part of collective freehold acquisitions;

• Commonhold voting rights in shared ownership properties; and

• The provision of information during the sale of a commonhold property.

So what do we think about all of these ?

There is quite a lot here, so I am going to focus first on the enfranchisement options, as after all this is very much ‘Leasehold Reform News.’ The big item is really the 25% rule as it might affect collectives.

The 25% threshold was discussed in the Law Commission’s work at some length – and for those whose buildings don’t qualify at the moment because more than 25% is used for ‘non-residential’ purposes this would be very good news – but, I am sure that there are plenty of buildings out there that have been specifically built with this limit in mind.

Developers, investors and pension funds may be less keen on losing the ‘jewel in the crown’ of their retail investment portfolio to an enfranchisement sub-committee – or indeed a rival investor who uses the legislation as a stalking horse to make this happen.

Don’t forget also that if you buy the freehold and there are no long leases in place of the retail units you would have to fund the purchase of these somehow. If you live in a flat over a ‘Bluewater’ like development this might cause something of a funding gap.

Unless, of course, the freeholder takes a ‘leaseback’ of these areas – meaning that you don’t have to fund these areas as the freeholder retains them on a long lease and you become their landlord. Well, at the moment that will only happen if the freeholder wants it to and many will say ‘no’ as they know that it will make the enfranchisement fail.

Mandatory leasebacks – and how this would fit with changing the 25% rule

But wait, what’s this? The consultation is proposing mandatory leasebacks – something of a ‘life hack’ for collectives ! If the freeholder had to take a leaseback then this will certainly make it ‘cheaper and easier’ as the cost (and value) in these areas stays with the freeholder.

Well, of course, if this did happen many many more blocks would be able to enfranchise and the debate would shift to the management issues that might arise in the after scenario.

So, what does all this this mean?

Well, if the law is reformed in this way, there will be a lot more enfranchisements in situations where this has not been possible before. Some of these will be quite complex mixed-use developments. If the requirement for mandatory leasebacks were introduced at the same time, then this would very much clear the pathway for a lot more collectively owned buildings, and, dare I say it, enfranchisement professionals will be kept very busy indeed.

A slightly belated, Happy New Year!

Mark Chick

12.1.2022

MHCLG Announcement: Government reforms make it easier and cheaper for leaseholders to buy their homes:

https://www.gov.uk/government/news/government-reforms-make-it-easier-and-cheaper-for-leaseholders-to-buy-their-homes

7th January 2021

Big news in leasehold reform – this is Leasehold Reform News if ever there was…

Right in the middle of Brexit, with news of what might be termed a ‘democratic deficit’ (no pun intended), in America we have this announcement from MHCLG that Robert Jenrick as Housing Secretary plans to get government to act on the proposed reforms to residential leasehold.

For those who have been following this story this is the culmination of the journey that started with the commentary in the White Paper ‘Fixing our Broken Housing Market’ and then led to the paper ‘Tackling Unfair Practices in the Leasehold Market.’ After this we had the Law Commission’s extensive work on the proposed reforms in this areas which led to the publication of their output paper ‘Leasehold home ownership: buying your freehold or extending your lease’ published on 20th July of last year.

Government now plans to act and this announcement makes plain their desire to adopt a number of the Law Commission’s recommendations, although what is also clear is that they plan to do this in two stage, the first most likely to be to take steps to ban ground rents and the second to pave the way for more comprehensive leasehold reform.

The exact details will become clearer in due course, but the headline news items that we can take away from today’s announcement are as follows:

• no more marriage value

• 990-year lease extensions at nil rent

• An industry wide commission on Commonhold – a ‘Commonhold Council’ charged with preparing the way to make this work

These are all massive changes and shows the government’s resolve to pick up on a number of the key recommendations in the Law Commission’s report.

Some initial comments on these appear below:

No more marriage value

This is massive and will not be popular with freeholders to say the least. It certainly will make it ‘cheaper’ to extend a lease or buy the freehold.  There is also an indication that a calculator will be made available to determine claims, whether the ‘calculator’ is to apply to all claims, or just simpler or lower value claims remains to be seen.

However, the proposal to remove marriage value (which often comprises up to 1/3 or more of the premium in many mid-lease length cases) is big news. There is almost certain to be a challenge from the larger freeholders under Human Rights legislation or similar. If we consider the position of say a high value flat on one of the Central London ‘Great Estates’ this is going to be significant.

990-year lease extensions at a nil rent

This is not a surprise – the plus 90-year lease extension has just been upgraded, by another 900 years and so won’t need doing again.

The nil rent element is no surprise either as this was (and is) the case for statutory extensions as things stand. The ‘surprise’ is in relation to leasehold houses – the new lease will be at a nil rent rather than the ‘modern ground rent’ under the plus 50 year extension that exists (and is never used) at the moment. You might ask what the point of this is – but it does give a leasehold house owner the right to make the lease much longer and buy out any existing ground rent in one go – although the current note is silent on buying the freehold – presumably MHCLG will propose to adopt in due course the Law Commission’s recommendations on making ‘units’ enfranchiseable so that both flats and houses are subject to the same regime.

The relevance to houses is a particular response to the so called ‘Leasehold Scandal’ of leasehold houses being sold by developers with onerous rent terms which in part have sparked the governments interest into reforming the law in this area.

Nil rent

It also appears that a cap will be set on the sort of ground rent that can be charged if lease is renewed outside of the statutory process. The detail is currently unclear, but possibly this may follow the Law Commission’s recommendations that any new rent could be imposed only during the existing lease term and might be subject to an overall cap. There is certainly an indication of a cap on the ground rent payable. 

Commonhold

We’ve been here before – when the Commonhold and Leasehold Reform Act 2002 came into force, in 2003, but this time there does appear to be a willingness to recognise that unless it can be made fit for purpose and also the “industry standard” (and possibly also compulsory?) there will be no take up.

An industry-wide cross sector committee would be very welcome to iron out the issues and to set the frame for other reforms that may be needed to make it work. Unfortunately, the current version of Commonhold is not sophisticated enough – and proper refinement for implementation may require other areas of law to be dealt with as part of this process.

So, what next?

As ever with a packed parliamentary agenda including both Brexit and Covid-19 we will have to wait and see. However, this announcement does make plain that legislation will be brought forward in ‘in the up and coming session of parliament’ to set ground rents to zero. The announcement states that this is part of a two-stage process of reforming the law with a response to the remaining Law Commission recommendations ‘in due course.’ That appears to indicate a longer time frame for the wider reforms.

Mark Chick

7th January 2021

We start our afternoon session with Mark Chick @section42, Katherine Simpson @EdwinCoe and Richard of @BeckettandKay This Hague House Clinic and Q&A session designed to give all delegates the lowdown from this week’s morning sessions. Questions and debate welcome! #ALEPConf pic.twitter.com/HOmz075jqU

— ALEP (@ALEPofficial) October 15, 2020

Just following up on a question raised during the Q and A session at the ALEP conference 2020 on 15th October 2020

The question concerned the rights of shared ownership tenants to extend their leases.

The position is unclear as the relevant case law shows. Whilst the Brick Farm case (see notes below) held that shared ownership leases were qualifying tenancies for the purposes of the 1993 Act as regards collective enfranchisement, so far as I am aware there is no reported case where a shared ownership lease has been the subject of a statutory lease extension under the 1993 Act.

I known that various housing association providers will do lease extensions on a voluntary basis and there is commentary on this in the Law Commission’s Consultation Paper (see paragraphs 9.24 onwards). However I am of course putting this out there so that if anyone knows different they can shout about it.

As we said in the session, if the position was completely clear cut then the Law Commission would not have mentioned both in the Consultation Paper and in their July report that the position needed to be clarified. They also recommend in both documents that future legislation addresses this issue- so that owners of shared ownership leases who have not staircased up to 100% should be able to extend under statute.

That is course leaves the slightly vexed question of how such lease extensions are to be valued. I was very glad that we had Richard Kay in our session so that I was able to pass this hypothetical question over to him.

That is one other thing that any proposed reforms will have to address when looking at the options to reform the valuation mechanism(s) for statutory cases.

Mark Chick

15th October 2020

I have set out the summary from the Consultation Paper below as it contains an excellent discussion of the relevant case law and sets out the Law Commission’s views.