Major Residential Leasehold Reforms Proposed
The Law Commission has recently announced plans to reform the English leasehold property system. The stated intention behind the Law Commission’s proposals is to make the system easier to use and more comprehensive for the parties involved.
The Leasehold Reform (Ground Rent) Bill (“LRGRB”) proposed the following changes should residential leaseholders wish to start a new claim for the acquisition of their property’s freeholds (i.e. enfranchisement) or an extension of their leases:
- Providing a new right to leaseholders of both houses and flats to a lease extension for a term of 990 years, with no ongoing ground rent under the extended lease
- Providing a new right for leaseholders to “buy out” the ground rent under their lease without also having to extend the length of their lease
- Removing the requirement for leaseholders to have owned their leases for two years before exercising enfranchisement rights and allowing flat leasehold owners to buy the freehold of a block where up to 50% of the building comprises commercial space
- Providing for groups of flat leasehold owners to acquire multiple buildings in one claim and allowing leaseholders to require landlords to take “leasebacks” of units within the building which are not let to leaseholders participating in the claim, in the hope that this will make it easier and less expensive for leaseholders to enfranchise
- Ensuring that a leaseholder is protected against the imposition of onerous or unreasonable obligations on acquisition of the freehold title to their property
- Replacing the various procedures for making enfranchisement claims with one, streamlined procedure
- Providing that all enfranchisement disputes should be decided by the First-tier Tribunal and, if the issue relates solely to valuation, the cases should be heard by a single valuer, to ensure the matter does not become unnecessarily protracted; and
- Eliminating or limiting leaseholders’ liability to pay their landlord’s costs, in place of the current requirement that leaseholders pay their landlord’s uncapped costs, which can on occasion exceed the enfranchisement price.
The Law Commission also made proposals in connection with the costs of an enfranchisement claim. There are proposals to limit the contributions leaseholders are required to make to the ‘non-litigation costs’ of their landlord.
If the government adopts a valuation methodology that is broadly based on market value, the Law Commission recommended that leaseholders should not generally be required to make any contribution to the landlord’s non-litigation costs on completion of the claim, save in low value claims, where a contribution may be required (capped at the amount of the premium).
If the government does not adopt a valuation methodology based on market value, it was recommended that leaseholders should continue to contribute towards their landlord’s non-litigation costs, but those costs should be calculated in accordance with a fixed costs regime. A system of security for costs was also suggested to ensure consistency across the different enfranchisement rights.
The proposals also contained provisions aimed at ensuring that new long residential leases are only granted at a peppercorn rent. Enforcement would be under threat of a civil penalty with fines of up to £5,000 for freeholders who charge ground rent in contravention of the restrictions. In the case of multiple breaches by the same landlord in respect of a lease, only a single penalty may be imposed but a previous penalty for other breaches would not prevent a further penalty being imposed. The government also indicated that it plans to prevent any financial demands for ground rent for future qualifying leases.
This aspect of the reform will not affect all leases. There will be a few exemptions, including:
- Certain parts of the community-led housing sector, so that they can retain the right to levy ground rent to maintain their ability to further promote community activities.
- Certain financial products, which depend on leases where rent replaces interest bearing mortgage payments, such as some equity release schemes and the Islamic finance sector.
- Business leases, where people need to live in the same premises as they work, to allow the parties to agree suitable terms for the overall occupation.
- There is nothing to indicate that there will be any changes for long residential leases that have already been granted subject to substantial ground rents. This, however, is yet to be confirmed.
There is no guarantee that all the proposals referenced above will come into force as detailed or at all. Should the proposals be implemented, it will likely be a long process before the changes come into force. However, the new proposals have promising implications for leaseholders wishing to acquire their freehold or extend their lease, especially in relation to costs.
In the meantime, it is important for those making decisions regarding residential property to bear these proposed changes in mind and consider how they might impact on their current plans.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.