Cabinet minister Michael Gove has not been shy in putting forward his intention of “destroying the outdated feudal system of leasehold“, at least as far as residential property is concerned. The Leasehold and Freehold Bill (“LAFB”), announced in the King’s speech which opened the new parliamentary session, falls some way short of this intention. However, it does show Mr Gove’s continuing intention to introduce measures which he claims are fairer for residential long leaseholders. Landlords may have a different perspective.
Nor are tenants left out: the Renters (Reform) Bill is back centre stage. Below, we take a closer look at the proposed legislation.
Sale of leasehold houses to be abolished
Selling new-build houses as leaseholds was an easy way for housebuilders to ensure that their developments continued to generate some value even after sale. Unfortunately, whether inadvertently or not, some leasehold houses contained ground rent reviews that increased exponentially, meaning that some homeowners found themselves with unsaleable and un-mortgageable properties. This drew the attention of the Competition and Markets Authority, which intervened to curb the practice. The Leasehold Reform (Ground Rent) Act 2022 abolished ground rents for almost all leasehold housing. When enacted, the LAFB will abolish once and for all the sale of houses by way of lease.
Lease extensions for houses and flats to be extended from 90 years to 990 years
The Leasehold Reform Housing and Urban Development Act 1993 (“LRHUDA”) gave long leaseholders the right to extend their lease terms for 90 years and remove the ground rent. LAFB will grant leaseholders the right to extend their lease by 990 years with ground rent similarly capped. This will deprive landlords of an ongoing source of revenue from the premium payable on each lease extension. In addition, leaseholders will no longer have to wait two years to take advantage of their statutory rights, but will be eligible immediately.
Abolition of “marriage value”
The quaintly named “marriage value” in lease enfranchisement refers to the increase in the value of the property following the completion of a lease extension, which reflects the additional market value of the longer lease. LRHUDA currently requires that this increase in value be shared equally between landlord and tenant and tightly-fought valuation issues have preoccupied the courts. LAFB intends to abolish marriage value, although this is likely to be prospective only. It is likely that this measure will be challenged in the courts.
Mixed use developments
Currently residential leaseholders in mixed use developments with 25% (by surface area) of non-residential property do not have the right to enfranchise or to take over management of the development. LAFB proposes to increase this proportion to 50% of non-residential property in a development (so that mixed use developments with only 50% residential use, not 75% residential use as currently required, will be brought within the ambit of the right to manage and enfranchisement legislation). It remains to be seen whether this is to be retrospective; if it is, then more commercial landlords will have to consider how to structure their developments to mitigate against this.
Judicial scrutiny of estate rentcharges for freehold properties
Estate rentcharges could be described as service charges for freehold properties; the money raised contributes to the upkeep and maintenance of a development. Whereas service charges in leasehold properties are extensively regulated, estate rentcharges are not. There has been disquiet from some quarters about unfair levies by estate owners. LAFB is likely to give freeholders obliged to pay estate rentcharges the right to have unreasonable charges reviewed by the tribunal, in the same way that leaseholders can currently challenge service charges. This measure will undoubtedly increase the administration costs of ‘landlords’ of estates as well as involving them in litigation.
And not forgetting the Renters (Reform) Bill…
Perhaps reflecting tensions within the current administration, this Bill was initially not even timetabled for the last parliamentary session. However, it finally had a second reading in the Commons after time was unexpectedly found for it mid-term. In a softening of the previous proposals, the suggested removal of “no-fault eviction” has been shelved pending a review of the functioning of the county court system.
In other respects, the Renters (Reform) Bill remains unchanged, except for a welcome and sensible addition for landlords of student housing (excluding PBSA). A new ground for possession is to be added, allowing for a landlord to regain possession of premises occupied by students at the end of the academic year, thus ensuring that a new cycle of student occupiers will be able to move in.
Producing LAFB will be a huge and complicated task and it is to be hoped that pressure to produce this piece of legislation will not impact on quality and therefore invite criticism by the judiciary, which has dogged much tenancy reform legislation in the past.
There is no joy in this Bill for landlords, seasonal or otherwise, but much to gladden a leaseholder’s heart. LAFB will increase administration and in many cases reduce the value of landlords’ portfolios. A general election is inevitable next year, but this is unlikely to halt the progress of the legislation for long. The shadow housing minister has been critical of both the Renters’ (Reform) Bill and LAFB, saying they just do not go far enough. At the risk of ending on a glum note: worse may follow (for landlords at least).
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