What you need to know about the new leasehold and freehold reform bill
Dec 7, 2023
The Leasehold and Freehold Reform Bill has finally been published. New laws to reform the leasehold rules in England and Wales have been a long time coming. The intention is to make some sweeping changes to leasehold law and residential block management.
There are an estimated 5m leasehold homes in England and 70% of them are flats. The Housing Secretary, Michael Gove, is looking to ban leaseholds for new houses but not for new flats, and to make it easier and cheaper for leaseholders to extend their lease or buy their freehold.
The Housing Minister, Michael Gove, says the Bill will fix a system that is fundamentally unfair: “The big problem for leaseholders is that they buy a property thinking it’s their own but as the lease runs out, they’re increasingly uncertain about the future of their property.
KEY PROVISIONS INCLUDE:
• Standard lease extension term will be increased from 90 years to 990 years for both houses and flats, with ground rent reduced to £0. The increase is up from 90 years in flats and 50 years in houses, and a reduction in ground rents to a peppercorn.
• Removal of marriage value from the cost calculation for leasehold enfranchisement.
• Removal of the existing requirement for a tenant to have owned their leasehold property for two years before they can extent their lease or buy the freehold.
• An increase in the percentage of non-residential floorspace (from 25% to 50%) which can be present in mixed-use buildings before residential tenants can buy their freehold or take over management of the building.
• Introduction of increased regulation and transparency, including the mandatory use of prescribed procedures and forms, in relation to service charges, rent charges, administration charges and estate management.
Karl Anders, Partner at Walker Morris: "The most glaring omission from the Bill is the government’s much-hyped pledge to ban leasehold tenure on the sale of newly built houses. The BBC has reported that the government will include the ban on leasehold tenure for new houses via amendments as the bill progresses through Parliament. There are also reports that some Conservative and Labour MPs would back amendments to expand such a ban to flats."
BBC Radio 4 consumer programme You And Yours with Winifred Robinson, gets the reaction from campaigners. Sebastian O’Kelly is the chairman of the Leaseholder Knowledge Partnership, a charity that protects ordinary leaseholders.
“This has come to a head because large leaseholders have applied escalating ground rents which has meant some properties have proved impossible to sell on. This particular problem will disappear, although it has largely been outlawed by campaigns such as our own.
“The increasing awareness has made leasehold houses so obviously toxic, that the first question people ask is ‘is it leasehold or freehold?’. Developers have largely given up trying to sell leasehold houses – it was always a trial too far.”
The Residential Freehold Association (RFA) represents freehold owners and says that capping ground rents retrospectively would be an unjustified interference with the legitimate rights of the freeholders and the pension holders that have invested in this sector.
This being the case, is Michael Gove right to be confident of getting this Bill into law by the time of the next election?
THE RIGHTS OF FREEHOLDERS
O’Kelly clarifies the rights of freeholders: “The RFA is pretending to represent pension holders. Pension fund exposure in the ground-rent game is now minimal. These funds were elbowed out by private equity over the last two decades as investors saw the value of residential freeholds. There isn’t a serious pension fund risk here at all.
“Existing ground rents are subject to a legal challenge and this is more problematic.”
There is an open consultation about ground rents which ends on December 21st. These vary from secondary or peppercorn ground rents (zero or of no financial value) to keeping them as they are at present. The various options to change ground rents will result in significant loss of income to residential freeholders, many of whom are anonymous and mostly based offshore.
RIGHTS OF LEASEHOLDERS
Does this mean that with proper consultation, the ground rent reform will not be open to a legal challenge, no matter how much the freeholders are losing?
“Hopefully the consultation will be useful as an argument to avoid a successful judicial review, or a Supreme Court case to challenge the restriction on ground rents,” says O’Kelly. We’re in quite a technical area here but it‘s certainly what Government officials believe.”
Michael Gove stopped short of banning the leasehold sales of new flats but he says the legislation will make it much easier for people to come together and self-manage the maintenance and upkeep of their flats.
The RFA says that only around one in five current leaseholders wants to take over the management of their building. O’Kelly does not accept this to be true.
“It’s nonsense. Most people would like to ditch an anonymous offshore freeholder telling them what to do and monetising a block of flats at the expense of leaseholders.”
CONVERTED HOUSES vs LARGE BLOCKS and DEVELOPMENTS
Obviously, if it’s a house that’s been converted into flats, it’s easy enough for five or six people to come together to manage it. But what about big blocks of flats and large developments? Residents often appoint management companies for the upkeep of the building, insurance, maintenance of car parks, gardens etc.
“This is a mis-conception. Nobody’s thinking that in a block of 500 flats, you try to divi-up the work amongst yourselves to sort out. You simply form a company with a board and you appoint a professional property manager to do it.
“These blocks of flats are extremely complicated engineering machines really, and come with a whole raft of litigation, and health and safety concerns. They’re beyond the capacity of an individual to manage. You do need a professional property manager.
“The difference is that the property manager will be answerable to a board of the residents rather than to an offshore freeholder that is trying to monetise the site with every wheeze conceivable. As referenced in the latest Government press releases.”
