Leasehold and Freehold Reform Bill Proposals

The long-awaited Leasehold and Freehold Reform Bill introduced to the House of Commons on 27 November 2023 has now had its second reading on 11 December 2023.

Leaseholders and freeholders alike wait with bated breath to see what the actual outcome will be, as there are a number of proposed changes that are anticipated.

Increasing the lease extension term from 90 years to 990 years

Increasing the statutory lease extension term from 90 years to 990 years is one of the most welcome proposed reforms, meaning that a lease will only need to be extended once in its lifetime. From a valuation point of view, the additional cost of extending the statutory term will not make as much difference as people may think as the most “costly” part of the lease extension premium lies in the first part of the extension (i.e. the first 20-30 years of the extended term). However, leaseholders will be afforded the comfort of only having to extend the term once, thus not having to pay multiple sets of legal fees to extend multiple times.

Removing the two-year ownership requirement

This is another very welcome proposal. At present, you only have the statutory right to extend your lease once you have owned the property for a minimum of two years. This has in the past forced many leaseholders to “bargain” with the landlord for an informal lease extension if they find themselves in a position where they need to extend their lease quickly, i..e. if they are looking to sell/remortgage.

It is common that when a leaseholder comes to sell his property, he is unaware that his lease is not “saleable” due to the term length and he finds himself. If the buyer requires a statutory lease extension as part of the sale, the seller can start the process and assign the process over to the buyer who will then “take the baton” and continue the process, including payment of the premium.

The new proposals mean that the buyer can wait until he has bought the property and then immediately start the statutory process himself, provided that the lease term is acceptable for mortgage purposes.

Increasing the “non-residential” limit from 25% to 50% in a mixed-use building for enfranchisement claims

At present, buildings where the commercial element exceeds 25% do not qualify for a collective enfranchisement claim. With more and more residential properties being developed above shops, this excludes a large number of buildings.

The Government proposes to increase the qualification of the commercial element to 50%, which is good news for tenants, although this may not be such good news for investors and freeholders who have acquired mixed-use buildings expecting to be able to retain the freehold.

The Government hasn’t yet made mention as to whether the proposed reforms will include mandatory leasebacks (where the landlord would retain a lease of the commercial premises (and any residential premises he may own in the building), but if not, then purchasing the freehold of an entire building, including the commercial element, may be out of the reach of a group of leaseholders due to the likely unaffordable premium. We will need to watch this space!

Capping ground rents on existing lease terms

The implementation of the Leasehold Reform (Ground Rent) Act 2022 means that it is no longer possible for freeholders to charge a ground rent for a new lease term. However, the Government launched a consultation on capping ground rents on existing lease terms, which closes on 17 January 2024 and the results of this consultation are eagerly awaited. Some of the proposed options are:

• Reducing all current ground rents to zero
• Capping current ground rents
• Setting them at a fraction of the property value

There has been a lot of challenge from freeholders to this proposed reform as freeholders would see a reduction in their income as well as a reduction in the value of their assets.

Changes to the valuation process

The Government have also proposed changes to the valuation process for both lease extensions and collective enfranchisements. Although the Government has promised to make it “cheaper and easier for leaseholders”, they have not yet published any further detail, albeit it is proposed that the “marriage value” element of the valuation be scrapped.

“Marriage value” is implemented into a valuation when the lease goes under 80 years and essentially means that the leaseholder pays additional compensation to the freeholder.

Again, freeholders are challenging this proposal due to the effect on the value of their assets and this could give rise to a Human Rights Act claim.

If and when

The above-proposed changes are potentially good news to leaseholders, although there is no guarantee the proposed changes will become legislation. The Bill has certainly brought up a lot of issues both on the side of leaseholders and freeholders and many think that rushing the legislation through could cause more issues down the line, which will then need to be “fixed”.

With regard to timescales, we are not sure when the legislation will come into force and whether some of the proposals will require further consultation and be implemented separately.

If a property is unmortgageable due to its low lease term or any other issues, then leaseholders have no option but to use the current legislation in order to extend/amend their lease.

If you need further advice in relation to the above, then please contact wewillhelp@jonathanlea.net.