The Leasehold and Freehold Reform Bill: mission impossible?

Posted: 23/01/2024

The mission which Michael Gove, Secretary of State for Levelling Up, Housing and Communities, has chosen to accept is to transform the current residential leasehold system, which he says is a ‘cynical money making scam’, into a system fit for the twenty-first century, so that a home is a ‘home’ and not someone else’s investment. 

Squaring up to fight Michael Gove are the large London landed estates and City institutions, who between them own multiple millions of pounds of ground rent investments.

The bill introduces widespread reforms to the Leasehold Reform Act 1967 (the 1967 Act) and the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act). Strangely, the bill omitted to ban new leasehold houses, even though the government said it would. No doubt this oversight will be remedied as the bill progresses through Parliament. 

Whilst some of the proposed changes are simply of a procedural nature, others will fundamentally alter the relationship between landlord and tenant.

What are the key changes being proposed?

• Leaseholders of flats and houses will be entitled to extend their existing lease for a further term of 990 years (this is up from 90 years for flats under the 1993 Act and 50 years for houses under the 1967 Act).
• The existing ownership condition of two years under both the 1967 Act and the 1993 Act is to be scrapped. From now on anyone buying their leasehold flat or house will be able to make an immediate application for an extension. This will make it much easier for buyers, who will no longer have to negotiate with their sellers and ask them to serve a notice of claim before they buy, which is the current position. This should speed up the conveyancing process.
• More mixed-use buildings will be brought into the scope of the 1993 Act. The current threshold of 25% is to be doubled to 50%. There will be many mixed-use buildings held by City institutions and investors which will see their value plunge with this potential loss of control. 
• One of the procedural amendments to the 1993 Act is to allow leaseholders to be able to force their landlords to take leasebacks of the non-residential areas in their mixed-use buildings. This will represent a complete reversal of the current arrangement and will reduce the price which leaseholders currently pay.
• A key change is to abolish ‘marriage value’ when calculating the compensation to be paid if leases have less than 80 years to run. This change, coupled with the government’s desire to retrospectively cap or remove ground rents from existing leaseholds, will result in billions of pounds being wiped off the collective value of ground rent investments (the Residential Freehold Association estimates that at least £15 billion is invested in ground rents and that the total value of investments in the residential sector is in excess of £30 billion). 

Consequences of change? 

Will we end up with a similar fiasco that was caused by the introduction of the Building Safety Act 2022, which caused the market in residential leaseholds to come to a complete standstill and which, at the time of writing, some law firms still refuse to act on? 

There is already one city investment fund (Time - a £200 million fund) which has suspended its operation due to ‘market uncertainty’ caused by the introduction of the bill. This is surely the first of many institutions forced to close shop.

Recovery of landlord’s costs

The bill proposes a complete ban on landlords being entitled to recover their costs of claims made under the 1967 Act and 1993 Act, save in very limited circumstances. 

It contains limited provisions allowing for recovered costs if the claims are withdrawn, but otherwise landlords will be required to meet their own costs, which for collective claims made under the 1993 Act can sometimes be considerable – particularly if there are several leasebacks, all of which need to be drafted from scratch.

Speeding up the conveyancing process 

The bill rather usefully contains proposals to speed up the conveyancing process by requiring the landlord’s administrative charges for the completion of LPE1 forms to be readily available and published on the internet.

Enhanced service charge information 

The presentation of service charge information is to be streamlined and standardised so it will now be possible to compare like for like costs between properties, and the style of the accounts is to be standardised so all buildings will have similar accounts.

The bill contains provisions requiring greater transparency of service charge costs and outlawing hidden commissions on insurance premiums, which should result in the level of premiums being reduced; although, given the current market practice by insurers to inflate their premiums by more than inflation, will there be any real savings passed on?

Estate charges and rent charges 

The bill introduces for the first time the service charge consultation safety guards which leaseholds enjoy for freehold properties, and which are subject to estate management costs and rent charges. Unfortunately, as the bill is currently drafted, the clauses defining rent charges are defective, but no doubt this will be picked up as the bill progresses. 

Removing ground rent 

The bill introduces a novel procedure for those leaseholders who already have a very long lease, making it possible to replace their existing rent with a peppercorn; however, it remains to be seen if this provision is necessary should the government decide to abolish ground rents.

Changes to RTM 

The bill introduces changes to the right to manage procedure so that the non-residential element is increased from 25% to 50%, and the leaseholders will not be required to reimburse the landlord for the landlord’s costs, save up to a prescribed maximum.

The future

The bill has cross party support and is a culmination of years of work preceded by various Law Commission reports, so even if the present government runs out of time to pass the bill, should a general election be called early, then the bill would be reintroduced by the new government.

Surprisingly with the word ‘freehold’ in the title of the bill, there is no mention of freehold reform in the shape of bringing forward commonhold to replace the existing leasehold system. Perhaps this will come in the next wave of land reform.

The changes which simplify the process of enfranchisement will be widely welcomed. The other, more radical changes affecting value are likely to be challenged if, as expected, the large London estates and pension investment funds see the value of their portfolio reduced.

The view of some commentators on this bill is that the government has missed the mark, because it would have been far better to have taken up the proposals put forward by the last Law Commission report and introduce a new piece of legislation, rather than to amend the existing legislation. 

Constant amendments to existing legislation have the opposite effect of ‘simplifying’ the law. There are various ‘bear traps’ in the 1993 Act which will remain untouched by this bill. For some leaseholders, it does not go far enough, and they see this as a ‘pruning’ of the existing system rather than full scale root and branch reform.

It is anticipated that the bill will be further amended as it progresses through Parliament, so as to introduce the government’s proposals to cap/ban existing ground rents and to ban the creation of new leasehold titles for houses.

It seems that the existing leasehold system will remain with us for some time to come. Will Michael Gove succeed in his mission? We shall see.

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