Wednesday, 6th December 2023

Leasehold Reform.  Where are we up to?

Designed to give homeowners a fairer deal and greater rights and protections, the Leasehold and Freehold Reform Bill was introduced to Parliament on 27 November 2023. Whilst it is still very much work in progress, the current draft contains a number of reforms which will have significant impact on the property market, flats’ owners and landowners. 

What is a leasehold?

A leasehold is a type of property ownership where an individual owns the right to use and occupy a property for a specified period of time, but does not own the land on which the building was erected. Instead, the land is typically owned by a separate entity known as the freeholder (or landlord).  A lease agreement outlines the rights and responsibilities of both the leaseholder and the freeholder, including any ground rent and maintenance charges the leaseholder may be required to pay. When the lease term expires, ownership of the property reverts to the freeholder, unless the lease is extended or renewed.

The system of leasehold property ownership in England dates back to 11^th Century. It was created to ensure someone (the freeholder) takes responsibility for the maintenance of common structures and areas thus relieving homeowners from the burden of directly managing and funding significant repairs. Professional management can also help ensure that properties meet certain standards, and help avoid potential neighbour disputes.

Nevertheless, there is general agreement that the system requires reform, and the new Bill should make it easier for leaseholders to:

• Extend their leases
• Buy their freeholds
• Take over management of their buildings.

What is changing?

The Leasehold and Freehold Reform Bill proposes to:

• Increase the standard lease extension to 990 years (up from 90 years in flats and 50 years in houses) with ground rent at zero.
• Remove the so-called ‘marriage value’, which makes it more expensive to extend leases when they’re close to expiry.
• Remove the requirement for a new leaseholder to have owned their house or flat for two years before they can benefit from these changes.
• Allow leaseholders in buildings with up to 50% non-residential floorspace to buy their freehold or take over its management (up from 25%).
• Set a maximum time and fee for the provision of information required to make a sale to a leaseholder by their freeholder.
• Require transparency over leaseholders’ service charges.
• Replace building insurance commissions for managing agents, landlords and freeholders with transparent administration fees.
• Require freeholders who manage their properties to belong to a redress scheme so leaseholders can challenge them if needed.
• Grant freehold homeowners on private and mixed tenure estates the same rights of redress as leaseholders.
• Build on the legislation brought forward by the Building Safety Act 2022.

The Response

Most of the proposed reforms constitute a mere expansion of the leaseholders’ protections which are already in place but theoretically will make it simpler and less expensive to own and maintain a flat. At the same time, the concept of leasehold as a contract between the Landlord and the Tenant in principle remains in situ and there will still be service charges and management charges, Landlord’s control on alterations and underletting and premium payable for lease term extension or purchase of a share of the freehold. Last but not the least, the most controversial issue of leasehold houses has not been resolved as the latest draft does not include the long-awaited ban.

Where are we up to?

The Bill is expected to become law before the next general election.

Affected freeholders should seek legal advice to prepare for the new legislation. For example, things to consider include:

• Whether the proposed cap on ground rent in existing residential leases will affect income.
• What might happen if more leaseholders decide to take over the management of their buildings and freeholders lose control.
• Whether less-experienced individuals managing buildings will lead to increased risks, higher insurance premiums, and devalued properties.

If you would like to know more about how the Leasehold and Freehold Reform Bill will impact you, please do not hesitate to contact Anna Severtoka or Mark Smith in our real estate team.

This article is for general purpose and guidance only and does not constitute legal advice.  It should not replace legal advice tailored to your specific circumstances.