Government announces new leasehold reforms but do they raise more questions than answers?

On 7 January 2021, the Ministry of Housing, Communities & Local Government (MHCLG) released a statement claiming that “Government reforms [will] make it easier and cheaper for leaseholders to buy their homes.” This follows reports from the Law Commission on the options to reduce the price payable, published in January 2020, and its report on enfranchisement, commonhold and right to manage, published in July 2020.

The key changes proposed in the Government’s statement are (emphasis added):

• Millions of leaseholders will be given a new right to extend their lease by 990 years;
• Changes could save households from thousands to tens of thousands of pounds; and
• The elderly are also protected by reducing ground rents to zero for all new retirement properties.

What does this mean and what impact will these reforms have on the leasehold sector?

The short answer: it remains to be seen, and perhaps an unintended consequence of the release has been sector-wide confusion due to the lack of detail provided.

Enfranchisement practitioners are all too aware of the numerous pitfalls and problems of current legislation comprising many Acts and Regulations. For many years we have, as an industry, agreed that reform is required to simplify the process to extend a lease or acquire a freehold, for the process to be fairer and more transparent. For example, it has never (to the writer’s mind) made sense for a lease extension to require a qualifying leaseholder to have owned a property for two years to commence a claim whilst no such period of ownership is required to collectively enfranchise. There is industry-wide consensus for an abolition of the two-year rule, but the statement makes no mention of it.

The statement, whilst welcomed, lacks the detail required to advise leaseholders on the extent of the changes and how they will be implemented in practice. Perhaps the statement should have been released with a little more detail?

Extending lease by 990 years

There will be an extension by an additional 990 years, but in practice there is very little difference in value and security to a lender than that of an already extended 90-year lease of a flat under the existing legislation. The universal right to a 990-year lease will apply to houses as well as flats. It is worth noting that leases of houses can currently only be extended by an additional 50 years.

It is clear from the statement that future ground rents will be set to zero in this upcoming session of Parliament but how soon, we will have to wait and see. Will there be a retrospective application to those leases deemed to have onerous ground rents? Will this apply to leases of flats as well as houses? Will this only apply to retirement properties? Onerous ground rents have been newsworthy for many years and some further clarity is therefore required on how such changes will work in practice.

Marriage Value

According to the statement, marriage value will be abolished. This additional compensation payable to a freeholder where a lease has less than 80 years unexpired, can form a significant part of a premium calculation. Will there be a replacement of this element to fully compensate freeholders? It remains to be seen. Will freeholders argue that any such changes would cause an unjust loss of income and capital value and challenge this under the Human Rights Act? This is quite possible.

Online calculator

The creation of an online calculator “making it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease” is perhaps one element that has raised much debate and controversy. A significant amount of time during a lease extension or collective enfranchisement is spent negotiating on the premium payable to the freeholder by the leaseholder(s). Is it truly possible to have a “one size fits all” online calculator? No two properties are truly identical. Will the many graphs used daily by highly experienced valuers, and the extensive list of comparables and tribunal decisions relied upon, be consigned to the history books, never to be relied upon again? What role, if any, will valuers play in the process? Watch this space.

Commonhold Council

Further, the establishment of Commonhold ownership appears to now be at the forefront of the Government’s thoughts. Perhaps a gradual phasing out of leasehold will result, but this will take time. There will be a “Commonhold Council – a partnership of leasehold groups, industry and government – that will prepare homeowners and the market for the widespread take-up of commonhold.” Whilst this model has been used in various forms throughout the world and has been on the statute book in this country since 2002, the uptake to date has been minimal.

This reinvigoration may be ambitious and there will need to be a clear advantage to favour Commonhold over the existing right to a 999-year lease with a share of freehold, which results for a leaseholder once they have collectively enfranchised. We await further clarification of the role of the Council and the draft legislation. This element of reform will not be in the upcoming session of Parliament.

Calling for clarity

The industry’s professional organisation, the Association of Leasehold Enfranchisement Practitioners (ALEP), has released its own response to the statement and usefully concludes stating that it is “calling for further clarity regarding the timescales of these changes, when the first draft of this legislation will be released and more detail on what these changes will actually look like in practice.”

For now, the devil is very much in the detail and without this detail, it is impossible to fully gauge with any degree of certainty the impact that these proposed reforms will have on the leasehold sector as a whole and how this will affect ongoing claims once legislation is enacted. A rewrite of the law in its entirety is going to take time and the extent to which the other recommendations in the 2020 Law Commission Reports will be implemented remains to be seen.

Any proposed changes and draft legislation will be subject to debate and possibly legal challenges under the Human Rights Act. Is it therefore realistic to expect substantive change imminently? Substantial reform is not anticipated imminently and it is still important to understand, at least for now, that the value of a property is reliant upon the length of a lease. If a lease is approaching 80 years, there is no reason to delay exercising your right to extend your lease. If a short lease is being acquired during the conveyancing process, a statutory lease extension claim should be initiated to protect the buyer’s position.

Whilst we now have a clearer idea of the Government’s intentions, we wait with bated breath for more details of the proposed framework within which a new arena of leasehold enfranchisement and ownership will operate, and for the impact these reforms will have going forward for not only leaseholders and freeholders but for those of us practising within the field.

If you would like to discuss your options for extending your lease and the impact the new proposals will have, please contact Katie Cohen.