Fixing the Building Safety Act Lease Extension Issue But at What Cost?

The Levelling Up and Regeneration Bill (“the Bill”) is making its way through the final stages of the legislative process, with the Lords’ amendments due to be considered on 17 October, before it proceeds to Royal Assent. This Bill presents an opportunity to fix the “lease extension problem” that has arisen out of the Building Safety Act. Clause 251 of the Bill is a noble effort to improve matters for leaseholders. But it poses the question whether rushing through a hurried amendment risks more unintended consequences and problems for leaseholders.

The Lease Extension Problem

A fundamental requirement for a lease to qualify for the service charge protections in the Building Safety Act (“the Act”) is that the lease existed on 14 February 2022. This created problems for leaseholders extending their qualifying leases. As all lease extensions take effect as a surrender and regrant, the old lease ceases to exist and the new lease is granted on the day of completion. The new lease did not exist on 14 February 2022 and can never have qualifying status even if the old lease qualified.

It quickly became apparent this was not the intended position but rather an unhappy consequence of hurried drafting. Government guidance made clear landlords were expected to agree provisions allowing new leases to benefit from the same protections as the old leases. Leaseholders were encouraged to report any landlords who refused, but there was no sanction for refusal. Leaseholders were left choosing between an extended lease and the protections provided by the Building Safety Act.

Fixing the Problem

The Government rightly promised to fix this through primary legislation when the opportunity arose. The Bill now presents such an opportunity, and the Government must be exhorted to make the most of this.

Clause 251 of the Bill inserts a new Section 119A into the Act. Under this new section, a qualifying lease which is varied or subject to any surrender and regrant will remain a qualifying lease.

It is important the lease extension problem is resolved, to bring clarity for leaseholders and landlords alike. The wording of the amendment is slightly unfortunate; a lease which has been surrendered and regranted does not and cannot “remain” anything, as it has been surrendered. It would perhaps make more sense to refer to the replacement lease adopting the status of the surrendered lease. That aside, the intention of this clause is clear and landlords would be hard-pressed to argue otherwise.

If enacted in its current form, the new Section 119A will also apply to all those lease extensions which have been granted since the enactment of the Act in 2022. Whilst retrospective legislation is not without concern, in this instance it seems to be addressing the fallout from the unintended consequences of the Act. This is good news for leaseholders.

Agreements to the Contrary Are Void

However, Clause 251 also provides that any agreement contrary to the new section 119A will be void, whether made before or after the coming into force of the section. On the face of it, this seems commendable. It prevents leaseholders being coerced into contracting out of their protections under the Act, or landlords requiring increased premiums to continue the protections. However, this clause provides that “any agreement” is void, not just the clause or provision which attempts to disapply the new clause. A natural reading of this would render void the entire lease if it contains a provision contrary to section 119A.

If this amendment is enacted as currently drafted, those advising on lease extensions must be extremely vigilant to ensure new leases contain no provisions contrary to S119A. But more importantly, this is seriously concerning for those leases which have already been granted prior to the introduction of this amendment. If any such lease is found to be contrary to S119A, the leaseholder may end up without any right to their property. Their old lease has been surrendered and their new lease rendered void. This surely cannot be what was intended. In pursuing the valiant cause of fixing the lease extension issue, the government are introducing yet more poor drafting with potentially serious repercussions. A simple tweak to refer to “provision” or “clause” in place of the word “agreement” would achieve the desired result without the broader ramifications.

All surrenders and Regrants

Practitioners dealing with more complex transactions should also take note that the amendment covers all surrenders and regrants, not just lease extensions. Leases are sometimes fundamentally altered, such as where significant changes made to the demise or multiple leases are combined into one. The expectation would perhaps be that the new lease represents a clean slate. But this would not be the case under the new S119A. The qualification status of the old lease (or perhaps even just one of several old leases) will carry forward to the new lease.

The Bill looks set to address the lease extension problem, which is right and good, but in fixing one problem it may introduce another, unless the drafting is improved.