The government introduced the much anticipated Leasehold and Freehold Reform Bill to the House of Commons on 27 November 2023, which the Department for Levelling Up press release billed as “part of the most significant reforms to the leasehold system for a generation”. It will increase the rights of England’s 5 million leaseholders, of which a staggering 1.5 million houses are leasehold houses.
A government amendment (NC42) tabled on 23 February 2024 includes the ban on the granting of a “long residential
lease” of a house from the date the provision comes into force, first promised by Theresa May in 2017.
The Bill will also impact the English Private Rented Sector as 38% of all properties that private landlords let to tenants are leasehold. This equates to 1.8 million of the 4.9 million properties in the PRS in England.
In this blog post, I explain key legal terms about leasehold reform that are used in the Bill, before going through its key provisions to explain what it means in practice.
In writing this post, I draw on my experience as a lawyer, and also as the former owner of the top-floor flat of the property you can see in the photo above, which was my “accidental landlord” rental property.
Let me know what you think about the Bill in the comments.
I’ll keep this blog post updated.
>> Related Post: Leasehold and Freehold Reform Bill Timetable: What happens when?
Last updated: 23 January 2024
Guide to the Leasehold & Freehold Reform Bill: At a Glance
- Explanation of key legal terms for leaseholders
- What new rights does the Leasehold & Freehold Reform Bill give leaseholders?
- 1. New rights of leaseholders to have longer lease extensions for flats and houses
- 2. The new rights of leaseholders to buy the freeholds of their houses
- 3. Changes to the valuation method for collective enfranchisement by leaseholders
- 4. Collective enfranchisement for more mixed-use buildings
- 5. Greater transparency over service charges
- 6. Introduction of transparency over estate charges
- 7. Changes to building insurance costs
- 8. Consultation on ground rent
- 9. New ban on sale of leasehold houses introduced
- What we learned in Second Reading of Leasehold and Freehold Reform Bill
- Committee Stage of the Leasehold and Freehold Reform Bill
- Report Stage and Third Reading of the Leasehold and Freehold Reform Bill
Explanation of key legal terms for leaseholders
Before we get into the detail what the Leasehold and Freehold Reform Bill promises to bring leaseholders, I explain the key legal terminology that is referred to throughout the Bill:
1. What does leasehold mean?
An owner of a leasehold property (a leaseholder) doesn’t t own their property. Instead, it is the freeholder who owns the land and the property built on it. The freeholder gives the leaseholder permission to live in the property which is limited to a certain number of years, on terms set out in a lease agreement, and subject to various pieces of legislation. The term of a residential lease is usually 99 or 125. The length of the lease decreases year by year until it eventually runs out, and reverts back to the freeholder, unless the leaseholder extends the lease or buys the freehold.
In return for the right to live in the property, the holder of the lease pays ground rent and a service charge to pay for repairs and maintenance. The lease agreement and legislation (such as this Bill, when enacted) govern the respective rights of the leaseholder and freeholder are governed by the lease agreement.
2. What is marriage value?
Marriage value is one of the strangest terms in the law of property! Schedule 13 of Leasehold Reform, Housing and Urban Development Act 1993 defines marriage value is the amount of the property increases in the value after the completion of enfranchisement or a lease extension.
Marriage value is very complicated to calculate. Justin Bennett of LBB Chartered Surveyors has explained that marriage value is “at its peak around 30-60 years when it is at 50% of costs”. According to the Leasehold Advisory Service, when calculating the marriage value, the valuer will “rely on local knowledge and experience to assess the increase in the value of the flat arising from the new lease”.
3. What is ground rent?
Ground rent is a sum which the owner of a leasehold property pays each year to the owner of the freehold. Unlike the service charge, the freeholder does not need to provide a service of benefit to the leaseholder in return. Sometimes this may be a nominal amount, but they often they increase over time, for instance, by inflation. There’s no requirement for ground rent to be reasonable.
Before 30 June 2022, leases often contained clauses obliging leaseholders to pay a rent which doubled after a set period of time. For instance, if the ground rent started at £250, and doubled every 10 years, this could become £2,000 after 30 years. These are referred to as doubling ground rent clauses. These clauses are very unpopular with lenders, and can make a property difficult to sell to anyone other than a cash buyer, unless the freeholder agrees to amend the clause.
Although the Ground Rent Act 2022 introduced a ban on ground rent clauses, the ban only benefitted new leases granted from 30 June 2022.
Ground rents are important as they reflected into the cost to the leaseholder of extending the lease, as well as potentially being an on-going financial burden.
4. What are service charges?
A service charge is a payment payable by the owner of a leasehold property to the owner of the freehold to cover the cost of insuring, maintaining, repairing, cleaning the building and any common parts. It may also include the costs of management services provided by the landlord or by a professional managing agent, and contributions to a reserve fund or sinking fund for future liabilities.
Service charges are a highly contentious area for long leaseholders due to a lack of transparency over what services are provided and how they are calculated.
5. What does collective enfranchisement mean?
Collective enfranchisement means the rights under the Leasehold Reform Housing & Urban Development Act 1993 for the qualifying leaseholders of flats in a building to join together and buy the freehold of that building. They each buy a share of the freehold, usually by means of a company in which each of the participating leaseholders has a share. The freeholder is unable to refuse a request if qualifying leaseholders of at least 50% of the flats in the building participate, and under 25% of the building is non-residential. The amount the leaseholders will have to pay is set out in a complex formula in the 1993 Act.
6. What are estate charges?
Estate charges are fees that the owners of properties on an estate, which may well be freeholders, are required to pay towards the upkeep of communal areas on a development. They differ from service charges for leaseholders which pay for the repair and maintenance of buildings.
Estate charges don’t pay for the upkeep of buildings, but fund services for the whole development, such as maintenance of the gardens, street lighting and the upkeep of any private roads.
What new rights does the Leasehold & Freehold Reform Bill give leaseholders?
1. New rights of leaseholders to have longer lease extensions for flats and houses
Clauses 7 and 8 of the Bill enable qualifying leaseholders of both flats and houses to obtain a 990-year lease extension at a peppercorn ground rent in exchange for a new valuation process that is more favourable to the leaseholder.
This is because the Bill removes the requirement for “marriage value” (see above) to be paid. It also caps the treatment of future ground rents in the valuation calculation at 0.1% of the freehold value. Whilst not a peppercorn, this is welcome news for leaseholders.
Until now, leaseholders have only been able to extend the leases for up to 90 years in flats, and 50 years in houses. The Bill will ensure that houses and flats will be treated the same.
Clause 1 removes the requirement for a leaseholder of a flat to have owned their property for at least two years before they can extend their lease. It also enables leaseholders of houses to extend their lease or buy their freehold as soon as they buy the leasehold house.
2. The new rights of leaseholders to buy the freeholds of their houses
The Bill enables leaseholders of houses to buy the freehold of their house as soon as they buy the house, instead of having to wait two years under the Leasehold Reform Act 1967.
3. Changes to the valuation method for collective enfranchisement by leaseholders
There are detailed provisions in the Bill which change the way in which the amount which leaseholders need to pay the freeholder in order to buy the freehold together. As with the change in the valuation method to enable leaseholders to extend their leases, the new valuation method removes the requirement for the marriage value to be paid, and caps the treatment of future ground rents to 0.1% of the freehold value. This will make it cheaper for most leaseholders to buy the freehold.
4. Collective enfranchisement for more mixed-use buildings
Should a group of leaseholders in a building wish to purchase the freehold together (collectively enfranchise) then under the Leasehold Reform, Housing and Urban Development Act 1993, they can’t do so if more than 25% of the building is non-residential. Under the Bill, this threshold will be increased to 50 per cent. This means that leaseholders of buildings with a higher commercial element to collectively enfranchise.
5. Greater transparency over service charges
As I know from experience, one of the biggest bugbears of leaseholders is the lack of transparency over the calculation of service charges by the freeholder (or their management company).
The Bill requires freeholders to be more transparent over service charges so that leaseholders will receive minimum key financial and non-financial information on a regular basis. This includes using a standard format for invoices, providing information about insurance and an annual report.
The intention is that leaseholders will have more information to enable them to challenge costs if they believe them to be unreasonable. Freeholders will also need to be more transparent over administration charges, by publishing up-to-date lists in advance.
As Michael Gove explained in the Second Reading debate: “a number of the people who have built, operated and retain the freehold on these estates levy service charges for all sorts of things that, in my view, are totally inappropriate. That is why the Bill makes clear that service charges have to be issued in a standardised format, so that they can be more easily scrutinised and challenged. It also makes clear that those charges can be challenged”.
Leaseholders will also have the right to request any information that is in the possession of the freeholder or managing agent regarding services, repairs, maintenance, improvements, insurance or the management of the buildings. It is like a “freedom of information” request for freeholders.
6. Introduction of transparency over estate charges
It can come as a surprise for people who buy the freehold of a new build house that they have to pay for the upkeep of the communal areas of the estate. The Leasehold and Freehold Reform Bill gives house owners the same rights to reasonableness and transparency when it comes to estate charges as leaseholders will have for service charges. They also have the right to challenge the charges at a Tribunal.
7. Changes to building insurance costs
Michael Gove commented in the Second Reading debate that freeholders had “abused their position” in relation to insurance commissions and that it was part of a “persistent pattern of behaviour that does require reform” to “milk” leaseholders.
Managing agents will only be able to charge transparent administration fees for building insurance, and won’t be able to receive commission from arranging building insurance on behalf of leaseholders.
8. Consultation on ground rent
The Government launched a consultation on 9 November 2023 entitled Modern leasehold: restricting ground rent for existing leases to obtain feedback on five different ways to cap ground rents. It’s the intention of the Government to decide which method to incorporate into the Leasehold and Freehold Reform Bill after the consultation ends.
- capping ground rents at a peppercorn
- setting maximum financial value for ground rent
- capping ground rents at a percentage of the property value,
- limiting ground rent to the original value when the lease was agreed
- freezing ground rent at current levels.
The consultation on ground rent ended on 17 January 2024. During the Second Reading debate, Michael Gove said that whilst he cannot pre-empt the outcome of the consultation, his “favoured approach” is that it should be a peppercorn.
>> Related Post: What leaseholders need to know about ground rent reforms
9. New ban on sale of leasehold houses introduced
Despite having been promised by Theresa May in 2017 and mentioned in the press release for the Bill, the ban on the sale of leasehold houses was not in the Bill as published.
A set of government amendments published on 23 February 2024 introduced the ban on the grant of a “long residential lease of a house” from the date the provision comes into effect.
What is the definition of a long residential lease of a house in the Leasehold and Freehold Reform Bill?
The Leasehold and Freehold Reform Bill defines a “long residential lease of a house” as follows:
- The lease has a long term (more than 21 years).
- The lease demises one house (a “separate set of premises on one or more floors which forms the whole, or part, of a building, and is constructed or adapted for use for the purposes of a dwelling […] it is not a house if the whole of or a material part of the set of premises lies above or below some other part of the building).
- It is a residential lease (the terms of the lease do not prevent the house from being occupied under that lease as a separate dwelling).
What we learned in Second Reading of Leasehold and Freehold Reform Bill
In the Second Reading debate on 11 December 2023, Michael Gove said: “freeholds have become utterly torn away from the warp and weft of the capitalist system as we understand it in this country, and have become tradeable commodities that foreign entities are using to exploit our people who have worked hard and saved to get their own home”. This earned him a back-handed compliment from the Deputy Leader of the Labour Party, Angela Rayner.
Why is commonhold not in the Leasehold and Freehold Reform Bill?
The government is not “reinvigorating” commonhold as recommended by the Law Commission in 2020, despite comments by Michael Gove in January 2023 in The Sunday Times that leasehold is “an outdated feudal system that needs to go. And we need to move to a better system and to liberate people from it”. He cited lack of parliamentary time in the Second Reading debate, but the former Housing Minister, Rachel Maclean, said that the word had already been done…
Instead, Michael Gove said they were “making sure that we squeeze every possible income stream that freeholders currently use, so that in effect, their [freeholders’] capacity to put the squeeze on leaseholders ends”.Whilst acknowledging there are some landowners and freeholders who take their obligations towards leaseholders seriously, he said that “individual leaseholders should not simply have to rely on the goodwill and good character of whoever the freeholder is; they need better protection in law, which is what we seek to achieve with the Bill”.
Angela Rayner promised in the Second Reading debate that a Labour Government would “make commonhold the default tenure for all new properties” and that they would implement Law Commission’s recommendations on enfranchisement, commonhold and the right to manage in full”.
Update on the Regulation of Property Agents
Michael Gove referred to the arguments about how property agents should be better regulated made in the 2019 report of the working group chaired by Lord Best on the Regulation of Property Agents as “incredibly persuasive”.
However, setting up a new regulator required “significant additional legislative time of a kind we simply do not have in the lifetime of this Parliament”, and although they are dealing with “some of the abuses for which managing agents are responsible, there is still some unfinished business”.
Committee Stage of the Leasehold and Freehold Reform Bill
The Committee Stage of the House of Commons started on 16 January, with two days of oral testimony from pressure groups and leasehold experts. It concluded on 30 January 2024.
Report Stage and Third Reading of the Leasehold and Freehold Reform Bill
The Bill is due to complete its passage through the House of Commons with the Third Reading on 27 February 2027.