2024 will witness several legal developments across England and Wales in the real estate sector.
Property owners, developers, investors, corporations, and funders are anticipating the implementation of the new legislation amidst ongoing government consultations to understand the implications and its effect on the overall property market.
In this article, we will focus on one of these new reforms that will positively impact millions of homeowners nationwide – the Leasehold and Freehold Reform Bill, announced by His Majesty the King towards the end of 2023.
So, let’s find out what this entails.
Exploring Leasehold and Freehold Reform Bill
If you buy an apartment in England, chances are you aren’t actually “buying” it. Like many tenants in London, you’re paying the property owner for the right to live there for a set period through a leasehold.
What Is A Leasehold Property?
A leasehold is a form of property ownership in England and Wales involving a lease. The term “ownership” falls in a grey area because the leaseholder isn’t technically the “owner.”
Leaseholders are “tenants” who lease the property from a “landlord” or “freeholder” for a specified period and only have certain rights to the property governed by the lease terms.
Leaseholds are common among properties with shared spaces, making it quite common to find flats and apartments on leasehold while the whole building is called the “freehold.” Only some houses are currently held as leaseholds.
Usually, leaseholders would pay ground rent, a service charge for property maintenance, and require permissions to perform certain activities on the property. For example, you may have to ask the landlord about renovating the apartment, owning a pet, and even if you want to sell the property.
However, with the recent discussions initiated by the bill, there has been a turntable of events that changed what we know about leasehold properties.
What Are The Proposed Changes
To provide leasehold homeowners with more rights and protection, these are proposed changes to the Bill:
1. Ban On New Sales Of Leasehold Houses
This ban applies only to selling new leasehold houses, not apartments or flats. However, it only allows selling a house under exceptional circumstances; besides this condition, every house will be a freehold from the get-go.
2. Increased Lease Extension Term
The lease extension term is set to 990 years with a cap on ground rent upon paying a premium. The bill also makes it cheaper and more accessible for leaseholders to extend leases close to expiry.
3. Abolishing Of ‘Marriage Value’
Before, extending a lease below its 80-year mark meant marriage value would be applicable, making the extension process more expensive, over thousands of pounds. Housing Minister Rachel Maclean stated that the marriage value will be abolished and details about the cost will come forward with the Bill.
4. Removal Of 2-Year Qualifying Period
Previously, you had to own a long lease for at least two years to initiate an extension. The proposed abolition of this rule will make it much more flexible for new leaseholders to start the extension process with a less cumbersome experience.
5. Easy Leasehold Property Buying And Selling Process
Freeholders, landlords, and managing agents charge extra fees, known as management packs, to provide specific information when leaseholders want to sell the property. The bill aims to enforce a maximum fee and duration for providing this information.
6. Transparency Over Additional Charges
It allows leaseholders to provide detailed information on their service, estate, administration charges, and insurance commissions to ensure they’re not subject to unjustified costs by challenging unreasonable charges.
Current Status Of The Bill
The Leasehold and Freehold Reform bill followed the Leasehold Reform (Ground Rent) Act 2022, which ended ground rents for new residential properties.
The bill is in its second stage. It was introduced on the 27th of November in 2023 by the House of Commons and was passed to a Public Bill Committee, where it was further scrutinised and amended.
With the third reading and reporting stage set for 27 February 2024 by the House of Commons, the Committee issued a notice of amendments on 20 February 2024.
With this update marking a significant milestone of the bill, many stakeholders eagerly await the reform that will reshape the housing market and empower leaseholders.
What Does The Bill Mean For Leaseholders
The transformative amendments of the Leasehold and Freehold Reform Bill have uprooted existing legislation by extending lease terms of residential property to 990 years.
So, what does this mean for tenants and freehold property owners? Let’s find out.
- The 990-year lease extension, in addition to the leasehold’s original term and removing the marriage value from valuation considerations, is a financial win for tenants.
- The bills promote collective enfranchisement in multiple-tenant buildings, giving tenants inclusive property rights with more autonomy to own and manage their properties.
- Removing the two-year qualifying period for lease extensions makes extending a lease simpler and more streamlined for tenants.
- Capping ground rents protects new leaseholders from increasing costs and malpractices while encouraging residents to choose commonhold properties for better control of their property.
The Future Of Commonholds
Although the Bill doesn’t specify any arrangements related to commonhold properties, they are seen as the future for leasehold reform, marking a sharp shift in the property system of England and Wales in centuries.
The Law Commission published a report on reinvigorating commonhold as the alternative to leasehold ownership in July 2020; this report consists of recommendations to make commonhold properties not just a working alternative but a “preferred” one to residential leaseholds.
While similar systems as commonholds are popular in the U.S. and Australia, the U.K. has significantly less. During the second reading of the Leasehold and Freehold Reform Bill, Michael Gove stated that “commonhold is the ideal form of tenure;” however, it would not impose commonholds as the standard.
Parting Thoughts
The Bill’s provisions are still under rigorous parliament debate and security, and it seems likely that further amendments will take place. While expanding leaseholders’ rights is a positive step, any effort to reduce ground rents will impact institutional investors and the residential property market.
