The Leasehold and Freehold Reform Bill for 2023-24 was presented to the House of Commons on November 27th, 2023. This Bill is relevant to England and Wales and aims to bring about lasting changes to enhance homeownership for lease and freeholders.
In this article, Lawhive’s expert property solicitors break down the new Bill and what it will mean for homeownership in 2023.
Why are leasehold reforms needed?
Homeownership comes in two main flavours: freehold and leasehold.
Freehold means you own the property forever and have quite a bit of control over it.
Leasehold is like borrowing ownership for a set time, often a 99-year lease. But, the catch is that control is shared with and limited by the freehold owner.
In England and Wales, most flats operate on a leasehold basis, while around 8% of houses in England are leasehold. All shared ownership properties fall under leasehold.
But here’s the problem: Leaseholders have been facing a bunch of issues with the current setup. This includes high service and administration charges without clear transparency, hefty costs to extend leases or buy the freehold, not-s0great practices by managing agents, a slow and costly sales process, and a dispute system that potentially leaves leaseholders on the hook for the freeholder’s legal costs. It’s this set of challenges that the Leasehold and Freehold Reform Bill aims to address.
What is included in the Leasehold and Freehold Reform Bill?
The Leasehold and Freehold Reform Bill was introduced in response to commitments made in the 2017 housing white paper and the 2017 Conservative Party Manifesto, as well as recommendations from the Law Commission in 2020. The Bill aims to:
- Make it more affordable for leaseholders in houses and flats to extend their lease and buy the freehold;
- Increase the standard lease extension to 990 and reduce ground rent to a peppercorn (zero) upon payment of a premium;
- Change the qualifying criteria to give more leaseholders the right to extend their lease, buy their freeholder, and take over management of their building;
- Improve transparency of service charges, making sure leaseholders get key information regularly;
- Give leaseholders the right to request information about service charges and the management of their building;
- Improve transparency of administration charges and buildings insurance commissions;
- Prevent leaseholders from facing unjustified legal costs, and allow them to claim their legal costs from the freeholder;
- Give freehold homeowners who pay charges for communal areas the right to challenge the reasonableness of charges and services;
- Make estate charges for freehold homeowners more transparent;
- Put in measures to prevent a rentcharge owner from taking possession or granting a lease on a freehold property if the rentcharge remains unpaid for a short period.
This Bill follows the Leasehold Reform (Ground Rent) Act 2022, which ended ground rents for most new residential leasehold properties in England and Wales. It’s part of a border legislative package to reform leasehold law.
What is not included in the Leasehold and Freehold Reform Bill?
The Leasehold and Freehold Reform Bill doesn’t include certain measures that were initially outlined in the background briefing notes to the King’s Speech on November 7th 2023. While these measures were anticipated, they aren’t included in current versions of the Bill. This includes:
- A ban on new leasehold houses;
- A maximum time and fee for freeholders to provide the necessary information to facilitate a quicker and easier buying or selling process of a leasehold property;
- The requirement for freeholders managing their buildings directly to belong to a redress scheme;
- Extension of building safety measures to further protect leaseholders.
The Government has expressed its intention to introduce amendments to the Bill during its passage through Parliament, indicating that some of these measures might be included later. Additionally, the Government has committed to revitalising the commonhold tenure and regulating property managing agents, but these specific measures are not present in the current Bill.
Leasehold Reforms: The story so far
The journey to the Leasehold and Freehold Reform Bill has been a series of steps and consultations aimed at addressing issues in the leasehold markets.
Following the housing white paper in February 2017 and the Conservative Party Manifesto in 2017, the government initiated consultations in response. And, in December 2017, outlined intentions to prevent the use of new residential long leases on houses, restrict ground rents, and ensure equivalent rights for freeholders on private estates.
In January 2021, the government announced comprehensive leasehold reform legislation in two stages, the first focusing on restricting future ground rents to zero. This came into effect on June 30 2022 in the form of The Leasehold Reform (Ground Rent) Act 2022. The second part of leasehold law reforms was announced in the King’s Speech in November 2023.
Leasehold Reforms in Wales
The legislation governing leasehold ownership currently applies in both England and Wales, with some variations in notices and document requirements. While housing policy is devolved, property law remains a reserved matter concerning Wales.
In May 2018, the Welsh government formally joined the Law Commission’s leasehold reform project. A task and finish group on leasehold reform was established and its independent report, Residential Leasehold Reform, was published in July 2019.
On March 17th, 2021, Julie James, the then Minister for Housing and Local Government, released a statement on the Welsh Government’s research into the sale and use of leasehold in Wales. The Welsh Government expressed full support for the Law Commission’s recommendations.
On November 28th, 2023, Julie James further confirmed the Welsh Government’s intention to lay a Legislative Consent Memorandum regarding the Leasehold and Freehold Reform Bill.
Criticisms of the Leasehold and Freehold Reform Bill
While the Leasehold and Freehold Reform Bull has garnered broad support across party lines, there are criticisms and calls for more comprehensive reforms.
The government has faced criticism that the Bill doesn’t go far enough in its leasehold reforms. For example, some critics are calling for a complete overhaul of the system arguing that commonhold should be the default tenure for all new properties.
Furthermore, The British Property Federation has expressed concerns about the impact on freeholders due to proposals to increase the enfranchisement threshold in mixed-use buildings and cap ground rents. The Property Institute also noted a missed opportunity in the absence of provisions to introduce competency standards or regulations to the property management sector.
This highlights that, even though there’s general support for the reforms, there are diverse perspectives and the scope and depth of them, with some advocating for more extensive changes than what is currently outlined in the Bill.
What does the future hold for Leasehold Reforms?
At present, the government is seeking input on various options to cap ground rents for existing leaseholders. The consultation outlines five key options:
- Capping ground rents at a nominal peppercorn rent;
- Introducing a maximum financial value for ground rents;
- Capping ground rents as a percentage of the property value;
- Restricting ground rents to the original value when the lease was initially agreed;
- Freezing ground rents at their current levels.
The Leasehold and Freehold Reform Bill has also progressed to the Committee stage, marking an important step in its legislative journey. During this stage, the Bill will undergo a detailed examination and the Committee will consider potential amendments before the Bill returns to the Commons for its Third Reading.
Michael Gove, in addition to highlighting the already promised key changes, has emphasised two specific aspects for an in-depth examination. This includes a detailed assessment of the rights and responsibilities of leaseholders in managing their properties (Right to Manage) and addressing the potential abuse of forfeiture clauses in lease agreements.
As the Bill progresses through the Committee stage, these specific areas of focus will contribute to (hopefully) shaping a more transparent and equitable leasehold system.
