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What’s coming next on leasehold reform

Experts from the Association of Leasehold Enfranchisement Practitioners (ALEP) have shared their predictions for the next phase of leasehold reform, following the government’s announcement that legislation will be introduced in the next parliamentary session.

It’s thought 990-year lease terms, Abolition of marriage value, as well as changing the 25% non-residential rule are on the radar.

In February the Housing Secretary Michael Gove announced the intention to abolish leasehold altogether, with a promise that further legislation to reform leasehold will be brought forward before the end of this parliamentary session.

Meanwhile, in early May levelling up minister Baroness Scott of Bybrook said in the House of Lords that the ‘very complex’ leasehold bill will be introduced in the next session of parliament.

Legal and valuation experts from ALEP have expressed scepticism that the leasehold system will be abolished any time soon, and in this briefing paper, share their predictions for the next round of legislative reforms which may (or may not) happen later on this year.

The government has already introduced legislation to ban ground rents on new leases under the Leasehold Reform (Ground Rent) Act 2022. However, there are a number of other un-resolved pledges such as the promise to ban the creation of new leasehold houses.

It has also promised to abolish ‘marriage value’ (an additional charge payable by the leaseholder when the lease they are extending has fallen below 80 years), although to date no information has been forthcoming as to when or how such a reform might be brought in.

Baroness Scott said on 3 May: “We will abolish marriage value, cap the treatment of ground rents in the enfranchisement calculation and prescribe rates to be used, saving some leaseholders thousands of pounds. An online calculator will also be introduced to make it simpler for leaseholders to find out how much it will cost them to enfranchise,’ she said.”

ALEP Valuer Advisory Committee member, Henrietta Hammonds, said: “The Government has been clear in its aim, which is to make the process cheaper and easier for leaseholders. What has been lacking, however, is the detail of how that will be achieved, while the outcome of any potential reforms remains very uncertain.”

ALEP Director Mark Chick added: “There are numerous issues raised by the scale of what would be involved in wholesale reform of the leasehold system, which in my opinion would be the ‘best’ or most ‘ideal’ solution. Although any reforming act would be massive and would take up a large tract of parliamentary time.

“I expect the next round of reforms will focus on reforming two areas; increasing and improving take up rights and making some simple adjustments to make it ‘cheaper and easier’ to enfranchise. My prediction is that the trickier task of wider valuation reform will come later, for example a manifesto commitment to abolish leasehold during the next parliament.”

What changes could the Government introduce next?

990-year lease terms

Leaseholders currently have a statutory right to extend their lease by an additional 90 years and remove the ground rent under The Leasehold Reform, Housing and Urban Development Act 1993. The Government has previously announced plans to enable all leaseholders with the right extend their lease to do so by 990 years, effectively removing the need to extend the lease again in the future.

Mark Chick continued: “As part of the next reforms, I expect the promise of a ‘short amendment’ to ensure that statutory lease extensions are to be for 990-year terms. This could be dealt with in isolation and would deliver on a previous ministerial promise.”

David Robson, ALEP Valuer member, agreed: “I expect we will see 990-year lease extensions introduced and a set of criteria aimed at catching the more straightforward lease extension and freehold purchase matters which are suitable for online calculation, using standard or prescribed variables to help simplify the valuation process.”

Abolition of marriage value

ALEP Valuer member, Clive Scrivener, said: “The Leasehold Reform (Ground Rent) Act 2022 has set the tone for future reforms. There is certainly potential that marriage value could be banned for any new leases, or a date could be set in the future for such a ban to take effect. However, I would expect the new reforms to focus on new leases going forwards and I think it unlikely that the Government will make retrospective alterations to existing leases, which would be legally problematic.”

Mark Chick added: “I think we will see the Government take some steps to deliver on the commitment to abolish marriage value, but I would expect this to be part of a wider package of valuation reform. However, freeholders will not be enthused by reforms to the valuation system that will reduce the value of their assets; such reforms could be open to legal challenge on human rights grounds.”

David Robson agreed: “Everyone would benefit from certainty. However, if the proposed changes involving marriage value are made, it is likely the introduction of any new legislation would see continued uncertainty whilst the matter is challenged by freeholders, given the significant impact such a change would have on their investments.”

Changing the 25% non-residential rule

There are changes that could be made to the legislation to make the enfranchisement process easier without changing the valuation basis, such as extending the right to enfranchise to more leaseholders. Under existing legislation, if more than 25% of the internal floor area of a building is used for non-residential purposes (e.g. shops or offices) then the building will not qualify for collective enfranchisement under existing legislation.

Henrietta Hammonds said: “I think changes to broaden access to enfranchisement are very likely as they would presumably be easier to legislate and would not invite legal challenges from freeholders. Such changes could include amending the rules as to how long a flat must be owned before it becomes eligible for a lease extension (currently two years) or changing the qualification criteria for collective enfranchisement, such as setting a new threshold for mixed-use property.”

Mark Chick continued: “Leaseholders would benefit greatly from a relaxation of the qualification threshold for mixed-use property and in my view the Government will increase the threshold to 50%. This could, if coupled with mandatory leasebacks, ensure a greater availability of rights to residents of this type of building.”

ALEP Valuer Advisory Committee member Mark Wilson added: “Another quick fix, and welcome change, would be to simplify lease extensions for low value homes. In many cases the fees cost a great deal more than the price of the extension, which rather defeats the purpose of the legislation.”

Will the Government abolish leasehold?

In February 2023, Housing Secretary Michael Gove announced the Government’s intention to abolish leasehold altogether, stating that he wanted to introduce legislation in the final parliamentary session, (i.e., before the end of this calendar year), ‘in order to change the leasehold system.’

ALEP members have expressed scepticism that the abolition of leasehold can be achieved without significant further work being done, including greater efforts to make commonhold a viable alternative to leasehold.

ALEP Solicitor member, Katherine Simpson, said: “Mr Gove’s meaningless and ill-advised statement about abolishing leasehold ignores the fact that many leaseholders are still waiting for reforms to the leasehold system that were promised following the initial consultation six years ago. Meanwhile, the passage of any bill through parliament will undoubtedly be slow, not least because of opposition from freeholders, especially investors, developers and pension funds, so it’s not something that could be delivered quickly.”

Mark Chick continued: “If by ‘abolition’ we mean replacing the existing system with something totally new overnight then, my answer is ‘no.’ This isn’t legally or practicably feasible. If we mean introducing a sunset clause for all new leaseholds once commonhold has been made fit for purpose, then that is possible. However, in my estimation commonhold is at least three to five years away from being viable at the earliest.”

ALEP Solicitor member Shabnam Ali-Khan agreed that leasehold is here for the foreseeable future: “I cannot see leasehold being abolished during my lifetime, there is still so much work to do. The Government cannot simply abolish leasehold and replace it with commonhold; the reality is we could be decades away from any potential abolition.”

ALEP Solicitor Advisory Committee Member, Anna Favre, fears that the introduction of commonhold could have unintended detrimental consequences for the housing market: “Introducing commonhold runs the risk of having two separate, but very distinct forms of home ownership running in tandem. This could risk creating a two-tier market, with commonhold developments attracting the greatest premiums, with a consequential decline in the value of leasehold properties.”

ALEP Valuer member Jeremy Dharmasena believes commonhold will only be introduced for new developments: “Retrospectively changing leasehold properties to commonhold seems fraught with difficulty, opposition and legislative challenge, so I would envisage it only applying in relation to new build properties, and then only if mortgage lenders agree. As such, commonhold may not provide the intended fix and the reality is likely to be bittersweet.”

Meanwhile, Henrietta Hammonds believes leaseholders could be left vulnerable by the introduction of commonhold: “There will need to be a huge amount of education for professionals (solicitors, valuers, managing agents, etc), mortgage lenders, and the public. Current legislation designed to protect leaseholders would fall away if leasehold was abolished, leaving residents vulnerable.”

Will the reforms be subject to challenges?

Any change to the leasehold system that affects the value of freeholders’ investments is likely to face challenges in the courts.

Anna Favre explained: “The industry will face challenges around these reforms, in particular ensuring that mortgage lenders are comfortable with the new forms of tenure and that practitioners are fully familiar with the legislation.”

Human Rights legislation could also be used by freeholders as the basis for a legal challenge.

Clive Scrivener said: “I feel the biggest objection to reforms will be Human Rights claims from freeholders whose investments will be impacted negatively. Often freeholders are not large companies, they are private individuals, many of whom are leaseholders themselves, and it is these people who will be most impacted. Furthermore, many freehold companies have obtained bank finance or secured lending against these freehold assets so there will be resistance to change from the banks and financial institutions which lend money.”

Henrietta Hammonds continued: “The rhetoric for many years has been essentially “poor, small leaseholder” vs “giant, mean landlord”. The reality is far muddier – there are thousands of very wealthy or even institutional leaseholders, and thousands of small landlords who may have a reversionary interest as a pension or other personal investment.

“There are many individuals who also don’t realise that their pension fund may well invest in ground rents, and should this legislation go ahead, the value of their pension will be affected.”

What should leaseholders do now?

Those proacting in the leasehold sector have been waiting for the Government to provide further clarity on its aims and intentions for the next round of leasehold reform and are unable to say with certainty what reforms the Government will seek to introduce next.. In the meantime, leaseholders have been left unsure of how to proceed.

Jeremy Dharmasena said: “It was January 2021 when the then Housing Minister made his statement that new leases would be granted for 990 years and that marriage value would be abolished. More than two years later, there has been no hint as to how that will work or be implemented, let alone the other raft of recommendations from a legal and valuation perspective proposed by the Law Commission.

“In the absence of any framework, these statements make it incredibly difficult to advise clients; their personal circumstances will dictate whether they can afford to wait and take the risk of reform (or not), or if they should take a ‘better the devil you know’ attitude and protect their investment now with certainty and understanding of the current regime.”

Mark Wilson agreed: “With reforms on the horizon, one still needs to be brave faced to give advice, as there are so many unknowns. Furthermore, bad press has damaged the leasehold market, making it inevitable that banks and building societies would shun short lease property. Driven by a lack of understanding, leases over 90 or 100 years are commonly extended. Low premiums with high associated costs often make these transactions poor value for money.”

Henrietta Hammonds concluded: “We are in a state of limbo until the Government can clarify the plans. This makes it difficult to advise clients and for leaseholders to decide what to do. Practitioners can only present clients with the information available at the time, advise them on the possible effects, and then let the client decide how to proceed.

“Either way, it is a gamble of sorts, and each situation is unique and requires individual tailored advice.”