The future of residential leasehold reform

14 Dec 2021

We have seen numerous and varied proposed changes in terms of residential property in recent times; there has been many consultations, reports, and government recommendations in this arena. There is bound to be changes in this area in the year ahead.
Focusing on the world of enfranchisement, the idea of residential leasehold reform started in earnest in 2017.Then in July 2020, we had some hefty law commission reports which set out a whole raft of recommendations. The government's stated aim is to make it easier and cheaper for leaseholders of residential properties to buy the freeholds from their landlords or to extend their leases. The first detail of what is coming in was announced  at the beginning of 2021.These include the abolition of marriage value, which will bring premiums down, and also an online calculator so there is consistency and transparency with the premiums being paid. There is also to be a single right for leaseholders to extend their leases by 990 years, rather than the current 90 years, and that will be at zero ground rent. There will also be a right to buy out the ground rent without extending your lease.
In terms of when these changes are becoming law, we are expecting the draft legislation on these reforms sometime next year (2022), but we have no indication of exactly when. Those practicing in this area are reporting that tenants are still seeing all these changes as very uncertain,  and so  generally, are going ahead anyway with enfranchisement claims and lease extensions now, rather than putting them on hold. The certainty of having their extension in place is much more valuable and it is often motivated by things outside of their control, such as their ability to sell their flat, or to get a mortgage against that interest. In terms of the freeholders of these buildings, there is a slightly different story. They are  more concerned  about losing the value of ground rents. So, they are  currently working hard to try and come up with ways of dealing with the problem by offering commercial deals to tenants now.
With regards to ground rents under new residential leases, in May 2021, the government introduced the  Leasehold Reform (Ground Rent) Bill into parliament, and we are expecting that to be passed sometime in 2022. On 30 November the House of Commons Public Bill Committee published an invitation to submit written views on the bill, which are now being considered. As drafted, this bill will restrict ground rents on newly established, not existing, long-residential leases, and will reduce ground rents to a peppercorn, effectively restricting ground rents to zero financial value.

The bill will also prohibit charging administrative charges in relation to those peppercorn rents. It will apply to leases of dwellings granted on or after the commencement of the new law, so it is forward looking, not retrospectively. Certain types of leases will be excepted from these restrictions, such as business leases,  statutory lease extensions and  community-led housing , and there are some special rules about shared ownership leases. If a landlord charges a ground rent under new leases which fall within the restrictions, then that will be a civil offence and there are some fairly hefty financial penalties for doing so. The bill will place a duty on trading standards authorities in England and Wales to enforce it, and also makes provisions for lease holders to recover any rents that they have paid that were unlawful.

The changes proposed by the Leasehold Reform (Ground Rent) Bill  are certainly going to impact the structure of ongoing management of new residential developments. Developers currently receive a ground rent income, and so without that income in future there  may be less incentive to retain any management functions.

Read our other predictions for 2022

Further reading

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Reversal of changes to High Net Worth Individual and Self-certified Sophisticated Investor criteria implemented

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