We already know that there will be a (residential) leasehold reform bill as part of the King’s Speech, but the Sunday Times today (29.10.23) has some more details about what might be included.
Leasehold houses
The most eye-catching proposal is probably the least important. We’re told that “All new houses in England and Wales will have to be sold as freehold properties”. That’s hardly new. It’s been government policy since Sajid Javid was (briefly) housing minister (i.e. back in 2016/17) and, frankly, the announcement of the policy has already largely destroyed the market in leasehold houses (see the House of Commons briefing here, para.2.2). There isn’t really any good reason to create leasehold houses these days so this is a welcome development. But the detail will be really important. Two things spring to mind.
First, the demise of leasehold houses means that estate rentcharges will becomes more important (to ensure that freehold houses pay towards communal estate services – I know this is sometimes referred to as “fleecehold” but that’s a debate for another day). The truly remarkable powers given to those who want to enforce payment of rentcharges in s.121, Law of Property Act 1925 need urgent reform (I’d say repeal). As we discuss here, and as this case shows here, non-payment of a rentcharge can result in your losing your home by a process which is even more draconian than forfeiture!
Secondly, what exceptions will there be? I would expect National Trust properties will be excluded. Crown land? ,Functional land of charities? Retirement properties where the lease includes deferred service charge payments (event fees providing a lump sum into the service charge on sale)?
Crucially, this is only about houses. Leasehold looks like it’ll remain the default for flats. If there is going to be a serious move to commonhold, then it doesn’t look like it’ll be in this Bill. And, frankly, that is a huge omission.
Ground rents
One good thing that this government has done is abolish ground rents with prospective effect for leases granted after the Leasehold Reform (Ground Rents) Act 2022 came into force. But this has created a two-tier market. New leases have no ground rent whereas older ones do. And these ground rents can be a problem. From the “doubling” scandal, to RPI increases which are painful in times of high inflation, to creating a problem with the assured tenancy trap (rents at such a level as to arguably make the lease an assured tenancy), leaseholders, potential purchasers and mortgage lenders have all become concerned about ground rents, so where there are two similar flats, one with a ground rent and one without, it doesn’t take a genius to figure out which one is the more attractive option.
But what to do about this? Well, apparently there will be a consultation on capping existing rents at a peppercorn. That’s frustrating for two reasons. First, why do we need more consultation on this issue? Secondly, capping existing rents at a peppercorn without *someone* paying *some* compensation to the person entitled to recieve the rent is obviously not compatible with Art.1, Protocol No.1, ECHRÂ and the government shouldn’t give people false hope. A statutory buy-out formula (such as exists for “profit” rentcharges) could be human rights compliant, even if it doesn’t result in 100% “market value” recovery. That sort of reform is surely more likely and more sensible. Unless the government intends to use public funds to compensate freeholders for the loss of ground rents?!
Lease extensions
This looks promising. The proposal is that all lease extensions (houses and flat) will now be for 990 years. Not only will it mean that a single lease extension solves the “wasting asset” problem forever, but it’ll also likely make enfranchisement easier and cheaper, since the residual value of a freehold subject to 990-year leases is obviously less than one subject to, say, a 90 year lease. What is slightly confusing is the suggestion that the government will abolish the requirement that you’ve lived in the property for two years before you can extend your lease. The “resident occupier” condition was abolished in 2002. I assume they mean that there will be no need to have owned the flat for two years (as is the case now). I’m more lukewarm on that reform. One negative consequence of the abolition of the residence test in 2002 was the growth in speculators buying flats and then seeking to extent/enfranchise. Why are we encouraging that? This is – or should be – legislation to help people fully enjoy their homes, not legislation to help someone build a property portfolio.
And the remainder
The Times also points to reforms on service charge and the right to manage. The latter is, I assume, going to be largely lifted from the Law Com proposals (‘tho some of those need updating in light of case-law developments) but I suspect will be relatively uncontrovercial. The service charge reforms could cover such a wide range of options that we’ll need to see what is proposed before forming a view.
In short, whilst this is all very welcome, it rather feels like the least that could be done given the huge number of policy announcements over the last decade and three large Law Com reports. Partly that may just be the political reality. We’ve only got a year or so left before there must be an election. Gove is already going to have a big fight on his hands to get the Renters (Reform) Bill past some of his own backbenchers (and the Tory Lords). Does he really want to pick another fight on, say, compulsory commonhold for new developments? But, should we have a Labour government at the next election, it means there will still be quite a lot given that their current policy is to enact all three Law Com reform reports (enfranchisement, RTM and commonhold) in full.
Lord almighty do we need some change in the lease hold system .
It has been ripe for abuse for years
Totally agree re the 2 year extension , would just help property speculators almost “trade” properties like stocks n shares .
I feel half of this malarkey could be reduced if there was a much more transparent process so freeholders couldn’t abuse the system .
Any way what do I know , I’m just a home owner who dislikes people being taken advantage of and seeing people get away with it .
I’ll follow (as I usually do GP) and hope some more knowledgeable heads can give you something to wrestle with .
Great work as alway GP thanks 🙏👍
It seems to me that the low hanging fruit if you want quick & easy reform to reduce pain to leaseholders is to a) end forfeiture and b) scrap marriage value. These are the least defensible from either a moral, or modern consumer rights perspective. b) would release those leaseholders trapped in unsellable flats because their lease is down to 40 or so years and the cost is prohibitive. Whereas a promise of 990 years extension does nothing for them. Any thoughts on why these wer overlooked?
Oh I suspect there will be some pro-leaseholder changes on marriage value. The Law Com has set out various options and, as you say, it’s easy and (from a government point of view) free. I’m not sure how much of a big deal it actually is. After all, you only pay it on your lease extension if you have fewer than 80 years left. Whilst I appreciate that lots of people do have short leases, I’m just not sure how big an issue this really is.
Forfeiture – entirely agreed. The windfall element cannot be justified in the modern world and there are other ways of ensuring debts get paid and covenants get enforced.
True there is much more awareness of the 80-year mark amongst new buyers. But some short leases can be found amongst older residents. What’s the situation with someone who wants to extend an escalating GR? Are they expected to pay off the total sum (eg ÂŁx for 10rs, ÂŁy for 10 yrs etc.)? And if so, are there any plans to cap the premium payable?
I don’t know about a cap on the premium. I rather doubt it given that this scheme needs to apply to Eaton Square as much as to modest properties in a depressed market town. I can see a cap on the capitalised ground rents (say, assume that the ground rent never goes above X% of the market value of the freehold) but this is the sort of detail that we won’t get until 7 November (at the earliest, probably not even until the First Reading of the Bill)
We don’t need leasehold for houses EVER.
The leasehold for Flats should be 990 year by default AND default to right to manage company setup with the leaseholders and automatically replaced by new leaseholders.
NO to consultation, JDI as statutory buy-out formula, seems reasonable, Giles don’t forget to invoice them for your consultation!
Service charges should be in name of a company owned by the leaseholders and it should be illegal for any other party than part owner to own or trade them. They should also be capped on increase and any increase requiring 75% of owners to agree the increase.
We need to put an end to any speculators, whether they be hedge fund types or oligarchs, quite simply, all property should be properly occupied with UK resident Council Tax payers. Any failure shall result in the property being seized and auctioned with proceeds going to homeless charities.
Any property that does not transparently show the ultimate owner and beneficiary of any company/Trust shall forfeit the ownership and be auctioned with proceeds going to homeless charities.
The original owners, builders, architects, conveyance agents and material manufacturers shall all be culpable for up to 100 years for building materials that are later found to be unsafe due to high fire risk. They should all obtain a liability insurance for this, if any companies are dissolved or cease to exist, then the person(s) who were Directors at the time of the construction approval shall be personally liable. The leaseholder shall never be culpable for such risk or outcome.
Like the consumer rights act which says core terms should be prominent, any negative terms in a lease should be first made prominent to the lessee in writing at least 14 days before the contract is exchanged.
A 1% levy on all new leases sold shall contribute to an ongoing fund to underwrite the replacement of cladding and other fire risks.
Sprinkler systems should be installed in all flats with more than 5 floors and be maintained as part of the service charge.
The problem over ground rents, particularly the 10-year doublers, would have never gotten underway if the Net Present Value of the ground rent was discounted using a defined rate set by the Government and shown next to the premium in Box LR6 of the prescribed clauses. It would have stood out for all to see especially if SDLT was paid on the total consideration. An onerous ground rent is surely a rent where its value is not appreciated. A ground rent of ÂŁ10,000 a year so large that everyone would sit up and take notice and reflect it in their offer by knocking off some ÂŁ200k off the premium. Therefore, large rents are not onerous, it’s the rents with poisonous reviews that can catch people out. Prior to 1974, credit agreements could have all sorts of terms which could catch out consumers. The Consumer Credit Act of 1974 and the requirement to show the APR helped eliminate some sharp practices – the idea of showing the NPV is an extension of the CCA 1974 in a way – pity that nearly 20% of the population thought APR stood for April!
The root of many of the problems is that mortgagees have dictated what they deem acceptable. A ground rent of ÂŁ400 linked every 5 years to the RPI on a 78-year lease on a flat worth, say ÂŁ275k will be very difficult to mortgage – but is it really a problem? How can a rent of 110 pennies a day destroy the value of a flat?
Stepping into the lender’s shoes, I can appreciate that they may have some concerns, but this could be overcome by giving a mortgagee the right if necessary, to extend the lease if they had to take back possession. If they knew they could do that, they might back off from the excessive caution they seem to apply to ground rent terms and lease length, which, thanks to social media, develops into a turbo thrust.
The hint of capping existing rents at a peppercorn, when given some further thought, shows how desperate this Government has become to grab attention from a group which may hold political sway. The Insurance industry and Long Harbour will run the case to Strasbourg . It plays to the gallery in the last act in the pantomime of this Government’s final term in office, knowing they can promise everything and appear to be thwarted by the lack of time.
Counsel’s opinion was sought when the Government was preparing its proposal for leasehold reform. Catherine Callaghan KC, in her written opinion, explains the complexity of the idea of capping a rent at 0.1% – that was, in her opinion, challenging so the new idea that the Government go further capping it at nil would seem absurd.
Making a landlord bear their own costs (mainly if the interest was acquired post-1993) would save the leaseholder significant costs – circa ÂŁ3.5K. A landlord who acquires their interest post-1993 should not need counselling to get over the shock of an enfranchisement claim or lease extension claim. It should produce a welcome profit. by making the Landlord bear their own costs should make the ritual dance a lot shorter and produce savings on the leaseholder’s part as well. It is also unlikely to incur the wrath of the Great Estates.
Making a landlord take an overriding lease over non-participators in an enfranchisement claim would also make the acquisition cheaper and avoid claim under Art.1, Protocol No.1, ECHR. But equally, the Landlord should be given the right to take an overriding lease over non-participators.
Marriage value being abolished would indeed make lease extension premiums on sub-80 years cheaper, but to appease the Great Estates ( who have of course, a very substantial investment in such leases), they could lower the deferment rate from 5% set in Sportelli to say 3.75%. This deferment rate of 5% was set in 2006 when the risk-free rate was 2.25%. Since then the Ogden Rate used in personal injury claims and was considered to be the risk-free rate fell from 2.75% to MINUS 0.75% and then recovered to MINUS 0.25%. Therefore it is justified to move that deferment rate down 1% to 1.5% . Indeed, the calculation would be more straightforward as there would be no trips to the no-act world (at ÂŁ275 per hour plus VAT) to try and estimate property valuers for clients.
My conclusion is that I don’t see any radical changes but much stronger tightening up on management, which is where the real problems lie for many leaseholders which will get strong cross-party support and deliver help – making leaseholders above commercial premises needing only perhaps 50% of the total floor area to set up an RTM would assist many.
The ECHR doesn’t consider leasehold reform in breach of Art 1 Protocol 1, this has been discussed at ECHR before in James vs UK Government https://en.wikipedia.org/wiki/James_v_United_Kingdom#:~:text=James%20v%20United%20Kingdom%20%5B1986,being%20in%20a%20valid%20public
The ECHR considers that…. “Eliminating what are judged to be social injustices is an example of the functions of a democratic legislature. More especially, modern societies consider housing of the population to be a prime social need, the regulation of which cannot entirely be left to the play of market forces. The margin of appreciation is wide enough to cover legislation aimed at securing greater social justice in the sphere of people’s homes, even where such legislation interferes with existing contractual relations between private parties and confers no direct benefit on the State or the community at large. In principle, therefore, the aim pursued by the leasehold reform legislation is a legitimate one”
If you look up “James vs United Kingdom” on Wikipedia, you will see how the ECHR has previously championed leasehold reform over freeholders’ property interests in spite of Article 1 Protocol 1. The European Court ruled against the claim on diminished value brought against HMG by Freeholders stating, “Eliminating what are judged to be social injustices is an example of the functions of a democratic legislature. More especially, modern societies consider housing of the population to be a prime social need, the regulation of which cannot entirely be left to the play of market forces. The margin of appreciation is wide enough to cover legislation aimed at securing greater social justice in the sphere of people’s homes, even where such legislation interferes with existing contractual relations between private parties and confers no direct benefit on the State or the community at large. In principle, therefore, the aim pursued by the leasehold reform legislation is a legitimate one”
Hence the comment in the post, that ” A statutory buy-out formula (such as exists for “profit” rentcharges) could be human rights compliant, even if it doesn’t result in 100% “market value” recovery. “. James v UK was on enfranchisement, which is an A1 P1 interference, but with what was found to be a reasonable/proportionate compensation payment arrangement.
James v UK is absolutely not support for a complete deprivation of property under A1 P1.
Yes, James is very, very well-known. The critical point in James is that the freeholder is still getting *some* compensation for the loss of his property. What James says is that it doesn’t have to be full market value because the national government gets significant leyway in deciding what is fair in the circumstances affecting that country. But it clearly can’t be zero compensation. Nor, I suspect, can it be just a few % of the market value (have a look at this case: https://nearlylegal.co.uk/2012/06/the-norwegian-blue/ and probably also have a look at the seemingly endless series of cases involving Malta and their rent control laws). And that is what the government needs to grapple with. There is a buy out formula for rentcharges (see here: https://www.legislation.gov.uk/uksi/2016/870/regulation/2/made). Those are analagous to ground rents. Perhaps that’s the way to go.
Counsels opinion was sought when the government was preparing its proposal for leasehold reform. Catherine Callaghan KC identifies two scenarios. The first is where a lease is granted and the premium does not reflect the burden a ground rent places on the property and the other where it does ( a non-statutory lease extension often does impose a higher rent in return for a lower premium) . In the first instance having a cap on the rent at 0.1% would expose the government to a low to medium risk of it being challenged. In the second case a high risk of it being challenged. Therefore, it seems most bizarre to say the least that in the face of such advice the Government elects to propose that all ground rent be capped at a peppercorn. Therefore, if the government was to introduce a cap and have regard to cases where a reduced premium was paid in return for a large ground rent, then it opens the floodgates to contentious claims where the landlord would argue that the flat was sold at a price that reflected the ground rent and the leaseholder would be arguing it didn’t. It seems impossibly daunting to find a solution to differentiate the two scenarios and yet make the process easier, quicker, and cheaper.
During the passage of the Leasehold Reform ( Ground Rent) Act 2022 an amendment to the then bill was proposed lowering all ground rnets to a peppercorn and this failed on the first reading .
The cynic in me thinks that the Government knows that such a proposal would fail, but can turn to the leaseholders ( an important group in the next election to win over) and state proudly, their heart was in the right place, but Europe has let us down (again) !
Perhaps my cynicism is raised further by the question; if the Government was sincere in wanting to make it easier quicker and cheaper for leaseholders to extend their leases or buy the freehold, why have they not acted sooner. In some 13 months’ time they have to have called an election and I wonder if the Government will again turn to leaseholders and state proudly that they wanted to help, but unfortunately there is no time – vote for us and we will carry on our good work.
Therefore, if the government was to introduce a cap and have regard to cases where a reduced premium was paid in return for a large ground rent, then it opens the floodgates to contentious claims where the landlord would argue that the flat was sold at a price that reflected the ground rent and the leaseholder would be arguing it didn’t. It seems impossibly daunting to find a solution to differentiate the two scenarios and yet make the process easier, quicker, and cheaper.
When the Leasehold Reform (Ground Rent) Bill 2022 was going through parliament, there was a proposed amendment seeking to have all existing ground rents capped at a peppercorn. It failed at the first reading.
The Government could set all rents to a peppercorn but do it by way of a sunset clause as noted by Jon above in respect of rent charges giving 60 years notice. This will of course start to erode the value of lease extensions more or less straight away AND make more of an impact where the rent doubles every 10 years and presumably would not fall foul of A1P1
I always thought that the Government’s setting the CMA to work on the 10 years doublers was kin to the Government’s action of putting the Black and Tans into Ireland after the First World War. I do wonder if these developers were “advised” that to take part in the next wave of Help to Buy or infrastructure projects that on the checklist to qualify these developers needed to put their house in order on the 10 years doublers. The fact the Government may have approached it in this way suggests that they perceive there to be a problem with getting 10 years doublers resolved. Why could they not have made an amendment to the Leasehold Reform ( Ground Rent ) Act 2022 ?
On charges for communal areas and services in freehold houses and freehold in commonhold estate, they lack the statutory protections available to leaseholders for reasonableness and consultation and accounting for service charges. Ultimately common hold will not take off as it is not understood by people or lenders, and won’t be no matter the education campaign. Without the protections they are at the mercy of the politics of “the board” which anyone with experience of a condo board or HOA board knows, they are no more safe than the freeholders who see service charges as a cash cow for them- who could recommend that? (NB an RMC/OMC board is very different to the board in commonhold).
The peppercorn rents will remove much of the incentive for an external freeholder investor and return to the 1990s standard of hand over the freehold for a ÂŁ1. It is about time that the right to accounts and the receipts, if not responded too, are ordered by the magistrates court on application from a leaseholder and not left to the local authorities’ discretion on whether to engage with a landlord, let alone prosecute. A standard notice could facilitate this on a summary basis.
Even better, commence the CLRA 2002 amendment requiring accounts to be automatically produced (alongside any other obligation) and remove the criminal penalty for not doing so or not allowing access to the records, replacing it with the threat of non recovery or limitation, through the FTT and County Court in the event of non compliance.
Forfeiture is threatened a lot but rarely rarely achieved. Given that county court proceedings for a debt are available, the obstacle is that courts usually award a rather small amounts of actual costs and leases usually focus on costs only available on the forfeiture route ( and then often not including costs incurred in “threats to forfeit” let alone the need for section 81 determinations and lets not get into their inclusion, or not, nor quantum, in the service charge).
Simple statutory amendment to old leases would permit full debt recovery costs to be billed to the leaseholder, subject to the right to challenge and determine these as an admin charge at the FTT. Including it in new leases would introduce a further hurdle to forfeiture ( for monies owed) in that it is prerequisite to have first gone down that route( and for why not the cost of injunctions for ripping out the walls or use as a house of negotiated affection, rather than straight to forfeiture).
In short if we put the obligation on the landlord to “show his work” automatically, the leaseholder can avail themselves of their rights. In turn the landlord ensures that having done so, they have a less tortuous route to ensuring payment vulnerable to costs of sending counsel to the FTT for simple matters ( especially if they are the very common resident owned or controlled block who have no other funds to access) to pay the insurance keep the lights on and most important these days, pay the accountable person and related works….without the only real resort being to forfeit.
These would somewhat clarify the current muddle. Lets not introduce a new muddle.
With respect, this is barking.
Estate costs for freehold are to be made challengeable in the same way as leasehold service charges under the proposed reforms.
Commonhold charges are challengeable in the same way as leasehold service charges.
Enfranchisement and ‘share of freehold’ is not only understood by people and lenders, but a positive asset on a proposed sale of a flat.
Handover of receipts and accounts by previous managing agents is not a section 21 /22 issue. It has nothing to do with the magistrates court or a prosecution by the local authority. (though yes s.21/22 need reform!)
Forfeiture is usually threatened for breaches other than arrears. But yes forfeiture needs reform.
I think if you are objecting to the current muddle, it would help if you had things straight. What I find remarkable is that you think a rent taking ‘investor’ freeholder is somehow better than a commonhold company. All either really do is instruct managing agents, with the difference that the rent-taker does not care any further.
You say “Ultimately common hold will not take off as it is not understood by people or lenders”. I’d argue leasehold only ‘works’ to the extent that leaseholders are naive as to the kind of contract they’re getting into. For instance most think they own the property they buy. Even conveyancers don’t always bother to read the lease or check for onerous clauses. And when you tell people about marriage value & forfeiture they can’t believe such feudal arrangements still exist!
Absolute Leases should be abolished. It means that the Freeholder does not need to be ‘reasonable’ in law and the Lessee has no right to challenge the Freeholder if they refuse permission to make changes to a flat. Absolute Leases combined with forfeiture clauses gives the Freeholder complete power over the Lessee and in the hands of unscrupulous Freeholders can be threatening.
Is there any hope of these issues being addressed in upcoming legislation?