Much-anticipated Leasehold and Freehold Reform Bill introduced to UK Parliament

Substantive change continues to sweep through the residential property sector. As pledged in the King's Speech, the Leasehold and Freehold Reform Bill was introduced to Parliament on 27 November 2023, given its second reading to the House of Commons on 11 December and now the Public Bill Committee has issued its call for evidence by 1 February 2024.

The lengthy 140-page draft bill seeks to provide greater rights and protections to long-leasehold home owners by amalgamating all the leasehold and freehold reforms that the government have been proposing for several years. This includes reforms to leaseholders right to manage, enfranchisement, lease extensions and freehold estate management for England and Wales.

Continuing the theme of leasehold reform,  the government has started dealing with the much-discussed issue of "onerous ground rents". It published a consultation on 9 November 2023 titled "Modern leasehold: restricting ground rent for existing leases", which proposes five possible options to cap ground rents in existing leases in England and Wales and designed to give leaseholders a fairer deal.

Despite the commitment in the government's accompanying press release, notably missing from the draft bill is the anticipated ban on the creation of new leasehold houses and several examples of drafting inconsistencies have also been pointed out. However, the bill is likely to undergo significant amendments (including covering the capping of ground rents) as it moves through Parliament which may iron out these and other issues.

Freehold acquisition and lease extensions

The bill proposes changes to simplify and reduce the costs for leaseholders for both freehold acquisition through enfranchisement and lease extensions, including:

• Removing the existing requirement for leaseholders to have owned their flat or house for two years before being able to extend their lease or purchase the freehold.
• Removing the requirement to pay the freeholder's legal and professional costs except in limited circumstances.
• Increasing the standard lease extension term to 990 years for both houses and flats (up from 50 years in houses and 90 years in flats).
• Leaseholders being given a choice about whether to acquire intermediate interests – although this provision is subject to complex conditions which arguably does not increase transparency for leaseholders.
• Removal of "marriage value" from the calculation of the premium cost for leasehold enfranchisement.
• Introduction of a compulsory standard valuation methodology for statutory lease extensions where the valuation assumes the freeholder is a "willing seller".

Service charges

The bill extends the existing statutory regulation of service charges to fixed service charges and aims to provide a fairer deal to leaseholders, by facilitating easier scrutiny and challenge.

It also includes provisions to increase service charge transparency by requiring service charge bills to be issued in standardised forms. There is also a new requirement for a written statement of account (in a specified form) to be provided by landlords within six months of the end of the 12-month accounting period, accompanied by an annual report.

Right to manage claims

The bill, as drafted, enables more leaseholders to bring rights to manage (RTM) claims by increasing the "non-residential" limit in mixed-use properties from 25% to 50%. The provisions will make it cheaper for leaseholders as the RTM company (or a member of) will no longer be liable for the landlord's costs,  apart from when these are awarded by the court or tribunal.

Freehold estate management

The draft bill gives new rights to freeholders who pay estate management charges towards maintenance and upkeep of an estate. For the first time it provides freehold owners paying these charges with statutory rights akin to those currently enjoyed by leaseholders with service charges, including, for example, rights to challenge the reasonableness of those charges.

There are provisions whereby a freeholder must consult with other freeholders contributing to those charges in relation to works that exceed an appropriate amount as currently given to leaseholders under section 20 of the Landlord and Tenant Act 1985.

However, these rights must be balanced with the reality that the common parts of many estates are ultimately owned by the residents (as with enfranchised blocks of flats), with no third-party source of funding.

Ground-rent consultation

Historically, ground rents typically constituted a nominal sum or a "peppercorn". More recently, not only has there been a trend for higher initial sums being sought but many leases also impose an increasing ground rent throughout the term of the lease. There is no legal requirement for the ground rent payable to be reasonable or in any way linked to a service provided to the leaseholder or the building.

The 2020 Competition and Markets Authority investigation into unfair ground rents in existing leases applied pressure on housebuilders to regularise the position retrospectively. The government subsequently legislated to recognise any imbalance between leasehold homeowners and their landlords and introduced the Leasehold Reform (Ground Rent) Act 2022 to put an end to the charging of ground rents for most new long residential leasehold properties.

Further reform is now underway with the publication of the latest government consultation in November, which seeks views on the capping of ground rents for existing residential leasehold properties. The consultation is currently set to close on 17 January 2024 and proposes five key options:

1. Capping ground rent at a peppercorn.
2. Capping ground rent at an absolute maximum value.
3. Capping ground rents at a percentage of the property value.
4. Capping ground rent at the original amount it was when the lease was granted.
5. Freezing ground rent at current levels.

It remains to be seen which, if any, of the proposed restrictions may be imposed, however the government has stated "regardless of the option taken forward we would not expect to compensate freeholder for lost revenue, nor do we expect freeholders would be able to capitalise this lost income stream through other means".

Institutional investors in particular will be watching closely as they may seek to  challenge any restrictions imposed without balancing the interests of the freeholder and providing adequate compensation for any resulting loss.

Osborne Clarke comment

There has been much talk of wholesale reform to the leasehold system in England and Wales for many years now, so, although seemingly far-reaching, the proposals may be criticised as not going far enough and not committing to abolishing leasehold altogether.

While the bill markedly does not deliver on the government's promise of banning leasehold houses, it is widely anticipated that changes will follow as the bill progresses through Parliament. It remains to be seen what those changes may include.

Discussion around commonhold – where the tenant also owns part of the freehold – is noticeably absent, although it simply may be too much at once for the industry where the rights of investor landlords have to be carefully balanced. This, combined with the uncertainty on the capping of ground rents pending the consultation outcome, means we will have to wait until 2024 for more clarity as to the full extent  of leasehold and freehold reform.