Leasehold reform – a case of winners and losers?
The Government's long-awaited Leasehold Reform Bill was published this week - but what does it mean for you and your businesses? Eleanor Bateman from the Public Affairs team take a deep dive into the proposed changes.
With a general election looming, the Government appears to be focused on tying up its loose ends.
The publication of the Leasehold Reform Bill ticks off another manifesto commitment to improve fairness in the property market (according to the Government, at least) and make lease extension cheaper and easier.
Why does leasehold need reform?
Department for Levelling Up, Housing and Communities (DLUHC) figures suggest that just under five million homes in England are leasehold, of which 70% are flats and 30% are houses.
Around 40% of leasehold homes are let in the private rented sector. The proportion of leasehold new-build homes has risen in recent years, and with it horror stories of doubling ground rents and punitive service charges, meaning political interest in leasehold reform is logical.
The Government consulted on the need for reform back in 2017, in response to the rapid increase in the number of leasehold new-build homes, which peaked in 2016.
The draft legislation adopts many of the recommendations made by the Law Commission and builds on measures implemented by the Leasehold Reform (Ground Rent) Act 2022, which set ground rent at zero on new leases from 30 June 2022.
The latest round of reforms includes measures that many will welcome.
But while the headlines declare that the legislation will ban new houses being sold as leasehold, the Bill as published contains no such ban.
The fine print in the Government’s press release suggests that the much-anticipated ban on new leasehold dwellings will be introduced as an amendment as the Bill proceeds through parliament.
Though the wait for a ban continues, the Bill does make it easier for leaseholders to take over the management of their building, challenge bad practice and ensure greater transparency of fees and charges alongside enhanced rights of redress.
However, it also contains provisions to reduce lease premiums, which may cause some concern for freeholders.
Who will benefit from the reforms?
In reforming the leasehold market, the Government aims to make it “fairer”. However, such reforms often resemble a zero-sum game, and improvements for some may leave others worse off.
Nevertheless, it is not simply a case of leaseholders benefitting at the expense of freeholders – some leaseholders may end up paying more to extend their leases due, for instance, to short leases becoming more attractive investments if, as the Government intends, it becomes cheaper and easier to extend.
At this stage, it is impossible to know who will benefit and by how much, as the draft Bill does not specify the rates that will be used to calculate the costs of lease extension (known as 'deferment and capitalisation rates').
These, the Bill stipulates, are to be set by Government at a future date, marking a significant shift away from current practice in which negotiations are conducted by surveyors and conveyancers.
What we do know is that the Bill as drafted will introduce key changes designed to reduce the costs of lease extension or enfranchisement for leaseholders.
These include the removal of ‘marriage value’ - an additional cost paid by the leaseholder on extention - and the capping of ground rent for the purposes of the lease extension calculation, both of which could leave freeholders worse off.
How will it affect the private rented sector?
The impact of the reforms is dependent on the actions of individual leaseholders, so it is difficult to predict exactly how the private rented sector will be affected. However, if the deferment rate set by government prompts landlords to sell, supply of private rented homes could become further constrained, to the detriment of those who rely on it.
Non-qualifying leaseholders hoping for a lifeline in the Bill will be disappointed, as the legislation as drafted does not rectify the limitations of the Building Safety Act and its associated regulations. However, as with the ban on new leasehold dwellings, the Government has promised an amendment to ensure that enfranchised leaseholders (who are currently non-qualifying leaseholders) are offered greater protection from the costs of fixing historic safety failures.
The Bill will receive its second reading on 11 December 2023. The Secretary of State, Michael Gove MP, has given assurances to leaseholders that the Bill “will be on the statute book by the time of a general election” so the pressure is clearly on to move quickly.
Separately, the Government has launched a consultation on whether and how ground rent should be capped on existing leases. The consultation seeks views on several proposals including abolishing ground rent entirely, freezing it at current rates or capping it either to a fixed sum or a proportion of the property value.
- Keep an eye out for our Q4 survey which will be launched in the coming weeks and includes questions related to both the consultation and wider leasehold reforms.