The recent King’s Speech was the first such speech to parliament from a king in more than 70 years. With more than 20 Bills to touch on, needless to say the Leasehold and Freehold Reform Bill did not receive a great amount of airtime. However, this doesn’t mean there are not big changes in the pipeline.
What can we expect from the Bill?
The speech itself contained the following detail: “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.”
Unpacking this statement, alongside the government’s briefing materials, reveals the following insights:
- The new Bill proposes to scrap the 90-year term and replace it with a much longer 990-year term. Essentially, leaseholders will only need to extend their lease once. Generally, this was not a massive issue, but nevertheless it will remove the expense for leaseholders in having to consider a further extension. The term of 990 years is an interesting choice, given that most leaseholders who acquire a share in the freehold opt for the standard 999 years.
- The Bill, if passed, will also mean there are no more new leasehold houses. While this proposal may be eye-catching, the prospect is not particularly exciting, as in reality there are not as many leasehold houses as there are leasehold flats, and generally it is considered much less of an issue.
- There is no mention of the potential prescribing of notices. Could we therefore have a potential widening of the jurisdiction of the First-tier Tribunal? This would not necessarily be a bad thing from a leaseholder’s perspective, though it would remain important to seek legal advice to ensure that the process is followed properly.
- The more exciting news is the removal of the two-year ownership requirement. This will widen the net of qualifying leaseholders and, crucially, take the hassle and stress out of buyers taking over the benefit of lease extension notices and the timings with completion. After all, the whole conveyancing process can be difficult, and having one less thing to worry about ought to be good news. Moreover, it eliminates the risk of conveyancing-inexperienced solicitors dabbling in the area and then getting it wrong.
- The government also announced plans to increase the more than 25% non-residential limit to 50%. Currently, if more than 25% of the internal floor area of a building (excluding its common parts) is used or intended to be used for non-residential purposes, there will be no right to acquire the freehold. This will open up the playing field to those buildings with flats and offices/shops. However, it remains to be seen how it works with insurance where the commercial and residential element could end up under different insurance policies. There may be an interesting interplay between the management of the residential and commercial areas. Presumably, the freeholder will continue to take a leaseback over non-qualifying units – shops, offices, etc. Leaseholders in buildings with a large commercial footprint will need to obtain detailed legal advice and understand their obligations.
- The million-dollar question is whether marriage value will be abolished altogether, and it remains unanswered. However, the additional details published along with the speech do indicate that lease extensions will become “significantly cheaper”. A 76-year lease costing £9,000 to be extended under the new rules rather than £16,000, for example, will surely be welcome news for leaseholders. This is a pretty dramatic move by the government and many will be eagerly awaiting the fine print to see how the policy will work in practice.
- In addition to this, it appears that landlords will be liable for all of their own costs in relation to lease extensions. This could be seen as unfair, especially for those landlords with small portfolios already being squeezed with mortgage increases in a tough BTL market. It is hard to compare with the much larger landlords with thousands of properties. If this crosses over into valuation fees, which it appears to, landlords will have to shell out fees for engaging valuers from the outset of the lease extension process.
The changes are largely good news for leaseholders. Making the process easier and cheaper are definite benefits. It will be interesting to see whether there is any backlash from landlords, as they are effectively being hit at least twice with costs and premiums. It is not clear that a broad-brush approach was necessarily the right approach. The devil will be in the detail, of course. What seems clear is that there needs to be a distinction between small landlords and much larger ones.
Service charges
Service charges are a huge issue when it comes to leasehold ownership and there will be some changes to help leaseholders tackle them. The outstanding questions are whether there will be reforms to the Landlord and Tenant Act 1985 and whether the process to challenge service charges will become easier. Challenging service charges through a FTT currently can be expensive. Failure to pay or withholding service charges can come with risks, including the threat of forfeiture and interest if the lease permits.
The government promises that the new Bill will bring greater transparency for leaseholders on service charges, apply standard formats for providing this information and introduce obligations for freeholders to provide information to leaseholders when selling.
The proposed removal of commissions on insurance may alleviate “backhander” concerns. We will have to see how the introduction of administration charges fares instead.
Summing up
Many anti-leaseholder campaigners would have been hoping for a ban on leasehold flats and not just houses. Ultimately, though, it is ambitious and fraught with problems to phase out the most common form of property ownership in England and Wales.
It is hard not to draw comparisons with the Renters (Reform) Bill, where key measures such as banning no-fault evictions have gone through multiple policy zigzags following political debate and scrutiny.
In many ways the announcements raise more questions than answers, and we must wait and see what is left intact after the consultation and legislative process. However, change seems inevitable, although we don’t know when and how wide the implications will be.
Shabnam Ali-Khan is a partner at Russell-Cooke and former senior adviser at LEASE
