Residential leasehold reform: test your knowledge

As part of the King's Speech on 7 November 2023, the Government announced further reform of the leasehold system in England and Wales, in the form of the draft Leasehold and Freehold Reform Bill (the "Bill").  The Bill, if enacted, will build on the changes implemented by the Leasehold Reform (Ground Rent) Act 2022 (see previous briefing here in the context of senior living) with the aim of granting leasehold homeowners greater security and additional rights.  The Governments has announced that its aim in the Bill is to "liberate leaseholders from the unfair and outdated leasehold system" by:

Empowering leaseholders

• Making it cheaper and easier for people to extend their lease or buy the freehold;
• increasing lease extension terms (from 90 years to 990 years) to give tenants more security and peace of mind;
• removing the requirement for a new leaseholder to have owned their house or flat for two years before they can exercise their right to collective enfranchisement or a lease extension; and
• increasing the 25% 'non-residential' limit to 50% in mixed-use buildings, meaning that where a building is up to 50% non-residential (i.e. shops, offices and so on), the leaseholders have the ability to buy their freehold or take over management of the building.

Improving leaseholders' consumer rights

• Making buying and selling a leasehold property quicker and easier, by setting a maximum time and fee for the provision of information by the landlord;
• giving greater transparency over service charges and insurance commissions;
• extending redress schemes to both leaseholders and freeholders on mixed-tenure estates so that they may challenge poor practices. This is likely to mean that landlords will be required to belong to redress schemes; and
• extending measures in the Building Safety Act 2022 to ensure leaseholders are protected.

Reforming the leasehold market

• Banning the creation of new leasehold houses; and
• capping existing ground rents (building on the work of the Leasehold Reform (Ground Rent) Act 2022).  A consultation has been released on how best to do this.

In terms of assessing the Bill's potential impact on commercial landlords, we think the following points are worth considering:

1. Whilst the Bill's most 'headline-grabbing' proposal is the ban on the creation of new leasehold houses, this is unlikely to have a significant impact on commercial landlords, because according to the House of Commons Library's Research Briefing the number of new-build houses sold as leaseholds as at December 2022 was less than 1% and leasehold flats are not included in the ban. Of the 207,000 leasehold sales in 2022, almost all flats were sold on as leaseholds whereas only 7% of houses were sold with this form of tenure. Practically, therefore, the ban may not carry the weight it seems to at first glance.
2. The most obvious way in which commercial landlords will be affected by the new measures is through the proposed cap on ground rent in existing residential leases, which will directly impact the income achieved from the leasehold properties within their portfolios. This may be particularly problematic for funds which own large residential leasehold portfolios, which may see a significant reduction in their return on investment. The cap's practical implication will ultimately come down to whether landlords are compensated, and at what rate, by the Government. This particular proposal is considered the most contentious within the Bill and it is anticipated it will be heavily debated in order to find a balance between the leaseholders' and landlords' rights.
3. Additionally, as proposed, the Bill increases the ability for leaseholders to take over management of their building, by making this right available to those whose building contains up to 50% non-residential space. The right to manage, initially introduced in the Commonhold and Leasehold Reform Act 2002, allows leaseholders to take over management of a building through a "Right to Manage" company and gives them the ability to choose contractors (e.g. managing agents), enforce obligations under the lease and take over all management and decision-making functions (albeit the freeholder must be kept informed in some circumstances). In effect, the freeholder loses day-to-day control of the building to a group of leaseholders who are unlikely to have the same level of expertise as them. Ultimately, this poses an increased and unforeseen risk to investment and has the potential to impact property valuation.
4. In addition to the increased potential for challenges from tenants with allegations of poor practice, the Bill proposes to scrap the presumption that the landlord's legal costs will be paid by the leaseholders, which cumulatively could create an administrative and financial burden.
5. Although very minimal details of this proposal have been shared so far, the proposed extension of the Building Safety Act 2022 could also place a greater burden on commercial landlords to comply with potentially rigorous obligations, including paying for costs associated with building safety defects.

The extent to which commercial landlords will be impacted is yet to be seen and, given the contentious nature of many of the proposals, it is feasible that the Bill could end up looking substantially different from the proposals laid out in the King's Speech. Please let us know if you would like to discuss a response to the ground rent consultation.  Otherwise, for now it is a case of awaiting the outcome of the consultation and the form of the Bill when it is put before Parliament.