Leasehold Reform – The devil is in the detail

We reported on the Government’s press release: Government reforms make it easier and cheaper for leaseholders to buy  their home on 7 January 2021.  Please click here for our insight. A few weeks on from the Government’s announcement, we consider the proposals in more detail.

Banning ground rents in new leases

The Government initially announced its intention to reduce ground rents in new leases to zero in June 2019 in a response to a 2018 consultation: “Implementing reforms to the leasehold system in England: summary of consultation responses and Government response”. Therefore, this development is far from unexpected. However, the Government had initially indicated that retirement properties would be exempt from this policy, based on evidence that the supply of retirement developments would be negatively impacted if no exemption were granted for the sector.

In a departure from this position, the Housing Secretary announced that zero ground rents would also apply to retirement leasehold properties. This was characterised by the Government as a measure to ensure that purchasers of these properties have the same rights as other homeowners and are “protected from uncertain and rip-off practices”.

The Government has indicated that the legislation banning ground rents in new leases will be brought forward in the upcoming session of Parliament.  However, its intention is for the inclusion of retirement properties to be deferred for a period of 12 months after the legislation is passed.

Enfranchisement

The changes to the enfranchisement procedure, announced by the Government can be summarised as follows:

• Leaseholders will have the right to extend the lease of a house or a flat by up to 990 years with ground rent reduced to a peppercorn;
• The price which leaseholders have to pay to extend their leases will be reduced by abolishing marriage value and setting calculation rates.; and
• For claims to purchase the freehold, leaseholders will also be able to opt to avoid paying “development value” if they agree to a restriction to future development.

Lease extensions

Whilst the principal of allowing longer lease extensions was expected following the Law Commission’s Reports in summer 2020, we are also anticipating a substantial overhaul of the enfranchisement procedure.  However, no announcement has yet been made by the Government on the Law Commission’s detailed proposals and the Government’s formal response is awaited.

The price payable for lease extensions

The calculation of the price payable for lease extensions is a complicated area. It is clear that some confusion has arisen in respect of this aspect of the press release. Whilst the Government’s stated aim has been to reduce the premiums payable by leaseholders, the Housing Secretary’s comments have been reported in some parts of the media as meaning that leaseholders will be entitled to extended leases free of charge. This is not what we understand the Government to be proposing. 

To assist the Government’s proposals to reduce the premiums payable, the Law Commission produced a report examining the options in January 2020, details of which are set out in our insight. Although the press release does not explicitly confirm, indicators suggest that the Government intends to adopt Scheme 1. It is notable that as part of its January 2020 report, the Law Commission obtained Counsel’s opinion on Human Rights aspects which concluded that the right to compulsorily acquire the freehold or extend the lease of a house or flat interferes with the landlord’s property rights under the European Convention of Human Rights (incorporated into English law by the Human Rights Act 1998) and will only be lawful if a landlord is suitably compensated to justify interference with those property rights. Counsel analysed each of the options put forward by the Law Commission and concluded that the question of whether Scheme 1 was compatible was “fairly finely balanced”.

In light of the comments of Counsel instructed by the Law Commission on Scheme 1, it is slightly surprising that the Government appears to be adopting this position without providing the detail behind its decision.

A number of worked examples of premiums based on the Law Commission’s various menu of options were set out in the Law Commission’s valuation report.  These suggest that the premiums receivable by landlords if Scheme 1 is adopted are likely to be significantly reduced than under the current statutory valuation methodology.  However, further detail is awaited from the Government in particular with regards to how calculation rates will be set. These are likely to have a significant effect on the level of premiums and it is impossible to gauge how premiums will actually change until we have further details on that aspect.   

In the meantime, many leaseholders are likely to have questions about whether they should commence a new lease extension claim or continue with an existing claim in circumstances where the law may change substantially in the future.  Landlords may have concerns about the reduction in premiums receivable in the future on lease extension claims.  No doubt, landlords and leaseholders will seek valuation and legal advice on their respective positions.

Commonhold

The Government has given the green light to commonhold and is proposing to set up a Commonhold Council made up of leasehold stakeholders to prepare homeowners and the residential market for increased take-up of commonhold.

As with enfranchisement, the expectation is that the legislative framework underpinning commonhold will be completely overhauled in order to make it fit for purpose. Further details are awaited and given significant issues with converting existing leasehold flats to the commonhold system, it seems unlikely we will see a significant shift towards this tenure before the Government sets out its full vision for the future.

Timing

The Government’s announcement indicated that the abolition of ground rents in new leases is to be examined by Parliament in the forthcoming session.  No indication is given as to the timing of the measures on enfranchisement and commonhold and further detail is awaited from the Government in order to fully understand the potential impact on the residential sector. What remains clear is that a dramatic alteration of the residential landscape lies ahead.

This is an area of fast paced change so please visit our Essential Residential Hub and our timeline: Changing landscapes in residential leasehold where we are tracking developments.

Please do not hesitate to contact Lauren Fraser, Laura Bushaway or your usual Charles Russell Speechlys contact if you have any queries. This insight is not a substitute for legal advice on the specific circumstances of your case.