The Leasehold and Freehold Reform Bill – What, Why, When, Where…?

Adam Davis, Partner in the Residential Leasehold Law team, delves into the Leasehold and Freehold Reform Bill, exploring the proposed reforms and the potential impact they will have on leaseholders and freeholders.

What is it?

The Leasehold and Freehold Reform Bill (“the Bill”) is the second part of a legislative package intended to reform the area of leasehold law. It follows the Leasehold Reform (Ground Rent) Act 2022, which put an end to ground rents for most new residential leasehold properties in England and Wales.

Why is it being introduced?

In 2017 the government pledged to protect homeowners from “feudal” leasehold practices and announced its commitment to “tackling unfair practices in the leasehold market”.  As part of this initiative, the government launched a consultation process aimed at establishing the most practical measures to, as they put it, “improve consumer choice and fairness in leasehold”. The consultation received over 6,000 responses, and consequently the government committed to legislate on a range of areas identified within those responses. The Bill therefore, following the implementation of the Leasehold Reform (Ground Rent) Act 2022, represents the culmination of the government’s stated commitment to bring about leasehold reform.

The intended function of the Bill is perhaps most aptly summed up by its own foreword, which states it is a Bill to:

“Prohibit the grant or assignment of certain new long residential leases of houses, to amend the rights of tenants under long residential leases to acquire the freeholds of their houses, to extend the leases of their houses or flats, and to collectively enfranchise or manage the buildings containing their flats, to give such tenants the right to reduce the rent payable under their leases to a peppercorn, to regulate the relationship between residential landlords and tenants, to regulate residential estate management, to regulate rentcharges and to amend the Building Safety Act 2022 in connection with the remediation of building defects and the insolvency of persons who have repairing obligations relating to certain kinds of buildings”.

In a nutshell, or a ‘peppercorn‘ if you prefer (ba-dum), a major objective of the Bill is to make it cheaper and easier for leaseholders of both houses and flats, to extend their leases or to buy their freehold.  It also aims to impose greater regulation on matters such as service charges, costs and management, whilst seeking to increase leaseholder eligibility for building safety protections.

What’s currently in the Bill?

Some of the main provisions in the current form of the Bill, designed to deliver the above objectives, include:

• Increasing the standard lease extension term for both flats and houses to 990 years, at a peppercorn ground rent. Previously, the maximum permissible term for lease extensions of flats and houses was 90 and 50 years respectively. This change is predicated on a new valuation process, intended to prove more favourable to the leaseholder by removing the requirement to pay “marriage value”, which is essentially the amount by which a property increases in value following the completion of a lease extension.
• Removing the minimum two-year ownership requirement for leaseholders of flats who wish to extend their lease. Similarly, it will enable leaseholders of houses to extend their lease or buy their freehold as soon as they purchase, instead of having to satisfy the current two-year ownership requirement.
• Introducing an outright ban on the grant and/or assignment of ‘certain’ long residential leases on houses.
• Capping the treatment of ground rents at 0.1% of the market value of the freehold interest for the purposes of calculating the premium payable for lease extensions and freehold purchases, thereby (theoretically) resulting in cheaper premiums.
• Increasing the eligibility of leaseholders within mixed-use buildings to enfranchise. Leaseholders are currently unable to enfranchise if more than 25% of their building floorspace is for non-residential use. However, The Bill will increase this threshold to 50%, thereby making it easier for leaseholders in buildings with a commercial element to buy their freehold or take over its management.
• Ensuring greater transparency for flat owners over service charges and how they are calculated, with a mechanism for leaseholders to obtain key information (financial and non-financial) on a regular basis. It is hoped this will enable leaseholders to challenge ‘unreasonable’ costs more easily with this information at their disposal.  In line with this, the Bill will also furnish leaseholders with a new right to request any information in the possession of the freeholder, or the managing agent, concerning service charges and the management of their building.
• Ensuring greater transparency over estate charges to freehold homeowners, in addition to a prescribed right to challenge any such charges at a Tribunal, if required.
• Ensuring leaseholders are not subject to any unjustified legal costs whilst also granting them a right to claim litigation costs from their freeholder in certain circumstances.

What may be in the Bill?

The government recently published an amendment paper which listed all tabled amendments to the Bill from the time of its introduction. These proposals, whilst subject to further consideration, could therefore still be incorporated into the final version of the Bill and some of the more significant amendments include:

• A provision to abolish the right of forfeiture in relation to residential long leases in instances where the leaseholder is in breach of covenant.
• A new clause giving the Secretary of State the power to bring “non-qualifying” leaseholders within the scope of the protections of the Building Safety Act 2022 (“the BSA”), in addition to the power to bring buildings under 11m in height (or less than four storeys) within the shelter of the BSA provisions.
• An amendment which would enable the Secretary of State to change the description of premises which are currently excluded from collective enfranchisement rights.
• Imposing an obligation on the Secretary of State to, “have regard to the desirability of encouraging leaseholders to extend their lease at the lowest possible cost” when determining the applicable deferment rates, used within the valuation process.

Where are we now?

The first point to note is that the Bill has not yet become law and, at the time of writing, remains in the intermediate stages of its journey through the Houses of Parliament.

It was introduced for its first reading in the House of Commons on 27 November 2023, and, having now completed its passage through that particular House, had its first reading in the House of Lords on 28 February. The second reading, which will take the form of a general debate on all aspects of the Bill in its current form, including the recently tabled amendments, is scheduled for 27 March.

Once both the House of Commons and the House of Lords have agreed on the final version of the Bill, it will then receive Royal Assent and become law, likely as the Leasehold and Freehold Reform Act 2024 (although it could be 2025!).

The below graphic illustrates the Bill’s progress to date, and its remaining stages.

Visit the Bill’s government website, which provides a live timeline of its status and progress.

When will it be introduced?

In view of the remaining review stages, there is no definitive timescale for the Bill’s enactment. However, Michael Gove, Secretary of State for Levelling Up Housing & Communities, has previously expressed his confidence that it would be passed in time for the next general election, stating, “I’m absolutely confident this bill will be on the statute book by the time of a general election. It has widespread support in the House of Commons and the House of Lords”.

To provide some context on a timescale for the next election, in January the PM Rishi Sunak earmarked an autumn poll, stating, “My working assumption is we’ll have a general election in the second half of this year.” However, there is growing political opinion to suggest he could possible call one as early as May. Either way, the next general election must be held before 28 January 2025.

Therefore, if we are to place any stock in Mr Gove’s statement, the Bill could be passed relatively shortly and the hastened timeline, outlined above, certainly seems to support this notion. Indeed, and as further evidence of the government’s appetite to expedite this process, it took only three weeks for the Bill to progress from first to second reading stage in the Commons, which is in stark contrast to the five-month hiatus endured by the Renters Reform Bill for the corresponding stages.

Put simply, the government is not hanging around with this one!

Summary

As currently drafted, the Bill proposes significant change to the current leasehold landscape in England and Wales, which will undoubtedly be of benefit to leaseholders. Until formally enacted however, and with the remaining scope for amendment, dilution and/or removal of certain provisions, the extent of this benefit remains to be seen.

In the interim, freeholders and leaseholders alike are pondering the merits of waiting for these potentially advantageous measures to reach the statute book before deciding how to proceed with their leasehold affairs, and this may indeed prove prudent. However, if you are in this camp, you would do well to balance your expectations against the above caveat that nothing is set in stone, as yet.

Conversely, waiting for the legislative dust to settle may not be an option for all as many are faced with the all too common and, unfortunately, time critical property dilemmas.  Perhaps you are a leaseholder who needs to sell your flat urgently but cannot do so due to your very diminished and unmarketable lease term. Or possibly the clock is ticking on your very favourable re-mortgage offer, a condition of which is that you must firstly extend your lease term in order to align with your lender’s requirements.

Whatever your circumstances and whatever the time considerations, our specialist team of leaseholder solicitors here at Coole Bevis LLP can help you to expertly navigate the reforms and achieve your objectives. Please get in touch with our Residential Leasehold Law team to discuss your specific circumstances.

Disclaimer: The information contained within the above article is for general information only and reflects the position at the date of publication.