The eagerly awaited King’s Speech, the first in over seven decades, not only made history, but most importantly for leaseholders, paved the way ahead for the Government’s planned leasehold reform.
King Charles III announced:
“My Ministers will bring forward a bill to reform the housing market by making it cheaper and easier for leaseholders to purchase their freehold and tackling the exploitation of millions of homeowners through punitive service charges.”
Little was given away during the King’s Speech itself, however, the Policy paper, The Kings Speech 2023: background briefing notes sets out the commitment to leasehold reform and the legislative changes which the Government will pursue in the forthcoming 2023-2024 parliamentary session.
What we do know
A Leasehold and Freehold Reform Bill set to be introduced
The proposed Bill is set to make it easier for leaseholders to extend their leases or purchase their freeholds and will tackle punitive service charges.
Lease Extension terms to increase to 990 years (for flats & houses)
The term of a lease extension will increase for both flats and houses to a 990 year extension rather than the current 90 year extension for flats and 50 year extension for houses.
Removal of two-year qualification period
The two year qualification period to commence a lease extension claim or buy the freehold of a house is set to be abolished allowing leaseholders to act immediately after the purchase of a leasehold property.
Collective Enfranchisement/Right to Manage: Reform of 25% non-residential rule
The qualifying requirement that the commercial element of the building i.e. a shop or office unit is 25% or less of the internal floor area of the building is proposed to be reformed to 50% or less to make it easier for leaseholders to purchase their freehold or acquire the right to manage.
A package of proposals to improve consumer rights
Proposed changes to assist leaseholders to bring greater transparency over service charges, crack down on insurance commissions, extend access to “redress schemes”, introduce a limit on freeholder’s and/or managing agent’s administration fees and time limits for responding when selling a leasehold property, introduce fairer practices and extend leaseholder protections to freehold home owners on mixed tenure estates.
New Leasehold houses set to be banned
All sales of houses to be on a freehold basis, except in exceptional circumstances.
Whilst the plan by the Government is to empower leaseholders, there is no explanation how the reforms will make it cheaper for leaseholders to extend their lease or purchase their freehold.
Making it cheaper for leaseholders
The Government previously advised that it would abolish “marriage value” which is a significant part of the premium payable when a lease term is under 80 years. There is no reference to “marriage value” at all in the policy paper or any plan or explanation as to how the Government intends to reduce premiums payable by leaseholders.
The Government’s paper simply includes an brief example of how a lease extension premium could reduce for a first-time buyer without any explanation how the reduction would be achieved.
Ground Rents (Possible Ground Rent Cap)
The Government advises that it will “consult on capping existing ground rents, to ensure that all leaseholders are protected from making payments that require no service or benefit in return, have no requirement to be reasonable, and can cause issues when people want to sell their properties. Subject to that consultation, we will look to introduce a cap through this Bill.”
There is failure to mention the Landlords/Freeholders costs, which a leaseholder is currently required to pay when they apply for a lease extension or to acquire the freehold which effectively results in a double costs bill for the leaseholder.
The example used by the Government, “hints” that the Government may tackle the issues of Landlord’s /Freeholder’s costs.
We are delighted that Leasehold Reform is now a priority for the new parliamentary session, however, we are still concerned by the lack of detail and uncertainty leaseholders will continue to face whilst the proposed reform process continues..
The Government’s simpler “quick fixes” which will improve the value and tenure of leaseholders home ownership, in our view, have a good prospect of being achieved within the new parliamentary session. These items will have little impact on the value of the Landlord’s reversionary interest or are simply tackling previous unfair practices, i.e. selling houses on a leasehold basis when there was absolutely no need to do so.
The lack of any detail in respect of the complex reforms to reduce the premiums payable for lease extensions or the acquisition of the freehold and the omission of any mention of “marriage value” raises concern of the Government’s planned strategy and whether the proposal will be watered down to the Government “consulting” in respect of the capping of ground rents.
The Government appears to be exercising a cautious approach to the more complex aspect of the reforms knowing that they will have a detrimental impact on value of Landlords reversionary interests. These aspects will be extremely political and subject to intense debate and scrutiny.
It is noted that there is no mention whatsoever of reinvigorating commonhold as an alternative to leasehold home ownership, which we expect has been put on hold, perhaps, the Government being realistic as to what it is able to achieve in the parliamentary session ahead.
We will now eagerly await the draft Bill itself to scrutinise the details of the Government’s proposed reforms and provide the best advice to our clients.
In the meantime, Leaseholder’s must remember that the proposed reforms will be subject to a considerable amount of debate and scrutiny including by external parties lobbying against the changes for example Pension Schemes, Charities and large Estate Landlords and it will remain to be seen which items will become law before the next general election.
Further, the reasons and cost of extending a lease or buying the freehold, will turn not only on the reform but other external factors, for example decreasing lease length, the market value of the property, planned major works/increases in service charges, interest and mortgage rates (if you need to re-mortgage), the market and the leaseholders personal circumstances if they wish to sell their property in the near future.
All aspects must be considered on a case by case basis when making a decision on the best way to proceed if you are a leaseholder waiting for reform.