What do the proposed reforms mean in practice?
Mark Chick is a solicitor specialising in leasehold enfranchisement and a partner at Bishop & Sewell LLP where he is the head of the firm’s landlord and tenant department. Mark has experience of advising on a wide range of issues relating to landlord and tenant, including property litigation, and is on the FtT frequent user panel.
What should a leaseholder who is thinking about a lease extension or enfranchisement do in the light of these proposals for reform?
We have been getting a lot of questions from leaseholders about the MHCLG announcement about the potential reforms to residential leasehold – and specifically whether to ‘jump or not to jump’ when it comes to taking the plunge and extending your lease or buying your freehold.
So, I thought it might be helpful to have a look at this in a bit more detail.
What are the proposed reforms?
The proposed reforms have been well reported elsewhere, so I do not want to dwell on these in too much detail and for further information and the full text of the 7th January announcement see Government reforms make it easier and cheaper for leaseholders to buy their homes – GOV.UK (www.gov.uk)
And:
The headlines – briefly
The headline news from this announcement is the following: –
- A ban on ground rent for new leases
- A change to statutory extensions so that these will be for 990 years rather than an additional 90 years on top of the current lease term as is the case at the moment
- A commitment to take steps to abolish ‘prohibitive costs like ‘marriage value’ and set the calculation rates to ensure this is fairer, cheaper and more transparent.’
There will also be steps taken to ‘reinvigorate’ commonhold through a ‘commonhold council’ (yet to be established).
The problem with attention grabbing headlines
Unfortunately, a lot of the headline grabbing news has been misreported, with the Daily Telegraph for instance, reporting initially that extensions would be given for free and for a term of 990 years.
We have seen a lot of people who have been somewhat misled by these suggestions and some of the reporting on this thinking that all of the above are law now, or will be in the very near future when the truth is likely to be significantly different.
It is also not clear (and I would say deliberately so), in the MHCLG statement as to when these changes will come in, it is after all a political statement, a press release from government, given at a time of much bad news for leaseholders in the wake of not only the ‘leasehold scandal’ but also all of the very proper concern over cladding.
The only firm commitment that I can see that the government has given leaseholders is that it will look to ban ground rent for new leases during this term of Parliament. They say they will “bring forward” legislation to do this.
This gives effect to a ministerial pledge made to the House of Commons by Sajid Javid back when he was housing minister in December 2017. The government also committed at that time to ban the creation of new leasehold houses because of the “leasehold scandal.”
How have these proposals come about?
What the politicians have done is to ‘cherry pick’ a number of items from the Law Commission’s output paper on reforming the law in this area. This extensive and excellent paper – called “Leasehold home ownership: buying your freehold or extending your lease” that was published on 20th July 2020.
This extensive (840 page) report and summary with recommendations is an academic work which was written by the Law Commission (an independent but publicly funded body) and presented to government to give the options for reforming the law in relation to residential leasehold.
However, government is not bound to follow the recommendations and, indeed in the press release all the MHCLG say is that
“Legislation will be brought forward in the upcoming session of Parliament, to set future ground rents to zero. This is the first part of seminal two-part reforming legislation in this Parliament. We will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course.”
So, what is clear is that government’s commitment is that they will respond to the law commission “in due course.” With all the other things that are going on, not least of which are Brexit and the coronavirus, it is quite easy to see how this could be some considerable time.
Indeed, it might be for a future Parliament to decide whether it wants to bring forward legislation in relation to this.
That leads me onto the next question which is how likely is it that any such legislation will come in?
How likely is it that any of these changes will come in?
The MHCLG announcement says that government will look to abolish complex and prohibitive costs like marriage value. But, as the Law Commission’s own report points out, if the pendulum swings too far, and there is a significant risk for instance of a Human Rights Act challenge to any really significant rebalancing of wealth by these means.
Therefore, in order to be viable, any future government will have to take a very balanced approach to getting this right to avoid the risk of delay. For those interested there is lots of excellent detail in the options for valuation reform that were put forward by the Law Commission.
The Law Commission recognised the highly politically charged nature of this and therefore only set out ‘options’ for the government to pick from rather than defining a recommended course of action. They also recognised that in doing this, their terms of reference for this work were some of the most politically charged ever given to the Law Commission.
What does this mean in practice?
In my opinion, any valuation reform is much more likely to come in any future work on changing the law in relation to enfranchisement as part of a much bigger ‘two stage’ process as the government press release puts it. Reforming valuation is much more difficult requires a more wholesale approach and, is much more likely to fit in with a wider program of reform.
There is lots of scope for debate on the text of any legislation doing this and the exact format that any reforms would take.
Is it all about marriage value?
A lot of focus has been put on marriage value. However, if certain elements of the calculation were adjusted – and there is talk of making the relevant compensation rates for other aspect “market rate,” or set by government department, by reference to market rate, then there are other areas such as for instance the ‘capitalisation rate’ that could prove to be a source of comfort to freeholders.
For instance, if this were set at a lower rate (and there is recent case law suggesting that this should be lower than it currently often is argued for), then this would have a very detrimental impact on the tenant’s position as the is would increase the amount paid.
There is therefore clearly more debate to be had around all of these concepts and how any reform would work in practice.
So, what should a leaseholder do?
If you have a short lease at the moment, there is really no option but to consider taking steps to extend or deal with this issue somehow, particularly if you want to sell or re-mortgage at any time in the next few years as it is not yet clear what shape these reforms may take and also more importantly when (if at all) they will come into effect.
Of course, whatever happens if there are changes this is likely to have an impact on the valuation and the overall direction of travel is stated to be ‘down.’ However, what is the chance that there will be a challenge in the drafting or in the implementation of these proposals? I would say, very likely indeed, particularly if they are too radical.
Adopt a wait and see approach?
If you can afford to wait, then perhaps you do take the risk, but you will need to keep the situation under review as, do not forget, at the moment, the market does not look favourably on leases with less than 80 years. Clearly, if you had to sell or re-mortgage for unforeseen reasons you would be more likely to be subject to heavy discounting because the shorter the least more likely you are outside the mortgage depend on market. That is a risk that anyone waiting takes, aside from the other issue that if the reforms do not come in as planned or are not as radical that the saving may not be as great. This would have to be balanced against diminishing lease length, which would on any analysis increase the cost.
What about buying the freehold?
There may still be very good reasons for doing this that won’t go away, particularly if one of your other reasons for wishing to do this is to change management and control.
In addition, if leases are over 80 years, there is no immediate impact on valuation and therefore, presumably the view is to “get on with it.”
The same could be said of lease extensions where the transactional costs and other items are unlikely to be significantly impacted in the short to medium term future and if you can take steps now, you simply avoid the risk of having the issue arise later on, if the reforms do not come in in the way that one might perhaps hope.
It would, in my view, be a very brave person would let the lease go under 80 years whilst waiting for these reforms to come in.
