Comment from the Association of Leasehold Enfranchisement Practitioners (ALEP)
By Shabnam Ali-Khan – Partner, Russell-Cooke
Following the rushed Royal Assent of the Leasehold and Freehold Reform Act 2024, further controversy has arisen. In the King’s Speech on 17th July, the new Leasehold and Commonhold Reform Bill was announced, but the full details of the Bill have yet to be released. We can expect more information on this in the near future. The current guidance highlights five key areas the Bill will address. We explore each of these in detail below.
1. Enact remaining Law Commission recommendations to strengthen leaseholders’ rights to extend their lease, buy their freehold, and take over management of their building.
The 2024 Act addresses most of the Law Commission’s recommendations on lease extensions and freehold purchases. These include offering a 990-year lease instead of the current 90 years, removing the two-year ownership requirement for flat lease extensions, and extending the right to acquire freeholds in buildings where the commercial area makes up to 50%. Additionally, landlords will now be responsible for their own costs in these processes, except in limited circumstances. The Act also introduces prescribed rates for premiums and eliminates marriage value for leases under 80 years.
So, what remains for the new Bill to address? Could these provisions be revised? It’s important to note that none of the leasehold reform sections of the Act which gained Royal Assent in June are currently in force.
Given the backlash by landlords concerning the removal of marriage value, it is likely that this will be revisited along with the other valuation provisions. The current human rights challenge mounted by Annington Properties last month may have prompted Labour to take another look at this. The Bill may outline provisions for an online calculator to assist parties in calculation of premiums, although this would hinge on whether the rates mentioned previously are prescribed. Currently the notices leaseholders and landlords need to serve in relation to flats are not prescribed. The Bill may provide an opportunity to consider this.
2. Reinvigorate the commonhold tenure by modernising the legal framework. Commonhold was introduced in 2002 as a way of enabling the freehold ownership of flats and avoiding the shortcomings of leasehold ownership. However, fewer than 20 commonhold developments have been established since the commonhold legislation came into force. The Law Commission put forward proposals for improving commonhold in 2020. The government intends to consult on options to restrict the sale of new leasehold flats so commonhold becomes the default tenure.
The 2024 Act did not address commonhold. It will be tackled by the new Bill. We may see some clear guidelines and provisions which make the process easier for leaseholders. Currently a building needs 100% agreement of its leaseholders to convert to commonhold. This may be reduced under the new Bill. However, if leaseholders are going to be forced to be part of a commonhold arrangement the Bill will need to improve lenders’ confidence in this form of ownership as well as providing owners with greater input in the process and how commonholds are run. Whether a ban on new leasehold flats will be introduced remains to be seen.
3. Regulate ground rents for existing leaseholders.
Despite government promises to cap ground rents this has yet to materialise. The ground rent scandal highlighted the onerous ground rents many leaseholders were facing with escalating, unaffordable rents making it difficult to sell or remortgage. The Bill may introduce caps to ground rent and potentially ban certain practices for new leases.
4. Strengthen the rights of freehold homeowners on private or mixed-tenure residential estates. The government will consult on the best way to achieve this.
The new Bill will aim to provide better protection for freehold homeowners against unfair charges and provide greater rights to challenge and more transparency. The Government has said it will consult on this to ensure freehold homeowners are better protected.
5. Remove the threat of forfeiture as a means of ensuring compliance with a lease agreement.
This means leaseholders will not risk losing their homes for breaching their lease agreements. Instead, the government plans to introduce fairer ways to resolve disputes and ensure compliance without such severe consequences. However, it is crucial this is balanced with protection for landlords against those leaseholders who persistently are in breach of their leases.
Where does this leave solicitors and other legal professionals? What advice should we be giving our clients?
Practitioners are experiencing challenging conversations with clients regarding the reforms and are feeling pressure to assist clients and prospective clients in making decisions, which is not within our remit. The main concerns are with lease extension and freehold purchase reforms, as we lack clarity on when and which provisions will take effect. However, it’s reasonable to expect that the non-controversial provisions, such as the introduction of 990-year leases and the removal of the two-year ownership requirement, will come into force. A few key tips below may help:
- Encourage clients to keep updated with the reforms
- Assist them in weighing up their options carefully and considering the commercial picture. For example if you are in the process of selling a flat and a short lease is causing difficulties in doing so, it may be preferable to bite the bullet and extend now
- Advise clients to seek valuation advice to help make a decision – valuers may be able to provide advice on various scenarios
- Be clear with clients that we can only set out the current position and what may come in, we cannot be certain what changes will be made and when – the ultimate decision rests with them
- The landscape is uncertain and people are frustrated, so it is important we remain understand and empathetic as well as clear in our advice.
