In recent years we have already seen the Leasehold Reform (Ground Rent) Act 2022 abolish ground rents for leases created after 30 June 2022 and the Building Safety Act 2022 (as varied by the Levelling-Up and Regeneration Act 2023) create protections for certain leaseholders from excessive service charges in relation to fire safety work. Yesterday, the government announced that a Leasehold and Freehold Bill will be introduced this parliament.
The Leasehold and Freehold Bill is intended to reform leasehold property in three key areas:
- Making enfranchisement easier and cheaper
- Improving leasehold rights
- Banning leasehold houses
1 – Making enfranchisement easier and cheaper:
What are the current rules surrounding lease extensions in England and Wales?
Currently, if the owner of a leasehold flat wishes to extend their lease and are unable to reach agreement with their landlord informally, they must follow the process set out in the Leasehold Reform, Housing and Urban Development Act 1993. This act provides that for a leaseholder to be eligible to extend their lease they must have owned the flat for at least 2 years; must have a flat in a building that does not consist of more than 25% non-residential use and must pay a “premium” to the freeholder in exchange for the extended term. Should the unexpired term of the lease be below 80 years, this premium may also include an extra “marriage” value due to the landlord. Under current legislation, on completion of the new lease, a leaseholder will obtain a lease on the following terms:
- An additional 90 years added to the term of their current lease
- Their ground rent will be reduced to a peppercorn (this means £0.00)
- The landlord will become entitled to buy the flat within the last 12 months of the current unexpired term and within the last 5 years of newly extended term
- Any variations required to modernise the lease
As well as paying the premium to the landlord, a leaseholder must pay both their own legal fees and the reasonable legal and valuation fees of the landlord.
What are the proposed changes to lease extensions in England and Wales 2023?
The Leasehold and Freehold Bill proposes to make it “it cheaper and easier for existing leaseholders in houses and flats to extend their lease or buy their freehold – so that leaseholders pay less to gain security over the future of their home.”
The proposed legislation will remove the requirement to have owned the property for at least 2 years and will increase the non-residential threshold to 50% to increase the number of properties eligible for a statutory extension. New leases will benefit from an additional 990 years (rather than 90) and ground rents will continue to be reduced to zero. It is stated that a leaseholder would only have to pay a reduced premium plus their own legal costs for a 990-year extension.
Whilst these changes may be good news for leaseholders, many landlords will be concerned about the ability to recover their own legal costs. If the proposed legislation is intended to function in a similar manner as the current law, landlord’s will be required to respond accurately and according to a strict timetable. If they are unable to recover reasonable legal fees for doing so, many landlords may choose not to seek independent advice and may fall foul of the necessary requirements.
When will these new changes come into law?
There is no date as of yet, until the bill passes into law, any leaseholder seeking to extend their lease formally will still have to proceed via the procedure laid out in the 1993 Act and must meet the strict qualifying criteria set out above.
What are the current rules surrounding buying your freehold?
Should tenants wish to purchase the freehold of their building and are unable to reach an informal agreement with their landlord, they may currently follow the procedures set out in either the Landlord and Tenant Act 1987 (the Right of First Refusal) or Section 13 of the Leasehold Reform, Housing and Urban Development Act 1993.
What is ‘Right of first Refusal’?
Right of first refusal applies when a landlord wishes to dispose of their freehold building which is subject to at least two qualifying tenants. They must currently serve section 5 notices on the qualifying tenants to give them both notice of the intended disposal and the right of first refusal to buy the freehold instead. To be eligible to accept the offer, at least 75% of the flats in the building must be considered qualifying tenants and of those, at last 50% must wish to take part in the purchase and accept the offer. The landlord’s section 5 offer may set out a price they have agreed to sell the building for or give notice that the building is to be sold at auction. There are different steps that must be followed depending on the type of disposal, but in either event the amount the freehold is sold for cannot be negotiated. The tenants may only accept or reject the sum that is included in the notice (or the sum that is agreed at auction). The 1987 Act does not permit the landlord the right to recover costs, however landlord’s will often include a contribution towards their costs as part of the process.
What is Section 13?
Leaseholders may group together and serve a Section 13 notice on their competent landlord with an offer to purchase the freehold. The offer must be realistic and must give the landlord at least 2 months to respond. If agreement on the premium cannot be reached the 1993 Act provides that the tenants may apply to the First Tier Tribunal for the premium to be assessed.
A strict time table must be followed when proceeding under the 1993 Act and care must be taken not to miss important deadlines.
On completion, the tenants must pay to the landlord the agreed premium as well as the landlord’s reasonable legal and valuation fees.
What are the proposed changes to buying your freehold?
As above, it appears that the government is suggesting that landlord’s will be unable to recover their reasonable costs as part of the process. We await full details of the act and its impact on the Right of First Refusal in the 1987 Act. For now, any tenants wishing to purchase the freehold title from their landlord should seek legal advice.
2 – Aiming to improve leasehold rights:
The Bill proposes to improve leasehold rights by:
- Setting strict time limits for landlords when supplying LPE1 responses / management packs to leaseholders who are selling their property.
- Requiring increased transparency of service charge costs.
- Removing landlord’s commissions charged on top of building insurance premiums.
- Extending access to “redress” schemes for leaseholders to challenge poor practice.
- Scrapping the presumption for leaseholders to pay their freeholders’ legal costs when challenging poor practice.
- Providing greater protections to freehold house owners on estates subject to rent charges / estate charges.
- Extending the protective measures introduced under the Building Safety Act 2022.
There is no doubt that the time taken by some landlords to provide management packs / LPE1 responses can cause delays to transactions, however lay landlords or those with “share of freehold” may have concerns regarding what time table will be set out and what penalties may be imposed for a failure to comply.
The government have also stated that they intend to consult on capping ground rents. The Leasehold Reform (Ground Rent) Act 2022 abolished ground rents on all new leases, but many tenants still pay ground rent to a landlord or face escalating or doubling ground rents which may prevent them from selling or successfully re-mortgaging.
3 – Banning leasehold houses in 2023:
Other than in exceptional circumstances, every new house in England and Wales will be freehold from the outset. Those houses on estates that are subject to estate charges for the upkeep of communal land will be pleased to see a commitment to bring the protections owned to freehold house owners subject to such charges in line with leaseholders who are subject to service charges.
How can our London property lawyers help?
As ever, the proof is in the pudding as they say, and we await sight of the actual draft legislation. Given the rumoured impending general election, it may be that the Leasehold and Freehold Bill does not pass into law at all and so we strongly recommend that any client considering extending their lease or partaking in the enfranchisement of the freehold of their building seek specialist legal advice.
Our specialist lease extension lawyers are able to assist with the process from start to finish. Our lawyers are experienced in both voluntary and statutory lease extensions and fully appreciate the potential perils involved in the process. Contact us today on +44 (0) 207 228 0017 or via the form below.