Leasehold and freehold reform bill – major changes coming

The long awaited Leasehold and Freehold Reform Bill had its second reading in Parliament earlier this month. Expected to come into force next year, the Bill will make a number of significant changes to the law on leasehold property, including on lease extensions, enfranchisement, service charges and ground rent. Freeholders will need to familiarise themselves with the upcoming reforms and key changes, which are summarised below.

Lease extensions

The lease extension process will be simplified and made more favourable to leaseholders:

• The Bill provides that the term of an extended lease will significantly increase from the current 90 years to 990 years.
• Leaseholders will continue to benefit from the ground rent under extended leases reducing to a peppercorn.
• The Bill will abolish the current requirement that a leaseholder must have owned their property for at least two years before they can exercise the right to extend their lease.
• The Bill further abolishes the concepts of marriage value (which is payable where the term of the lease is less than 80 years) and hope value, which are currently used to determine the premium payable for a lease extension. Instead, a simpler valuation methodology will be introduced, which is likely to reduce premiums for leaseholders, particularly where the existing term of the lease is short.

Enfranchisement

Enfranchisement – the process through which a group of leaseholders can acquire the freehold to their building – will also be simplified:

• As with lease extensions, a standard valuation methodology will be introduced, which is likely to reduce the premiums payable, and the Bill will abolish the current requirement that a leaseholder must have owned their property for at least two years before they can enfranchise.

The Bill will widen the category of buildings which are eligible for enfranchisement to include those with up to 50% commercial use (currently, only buildings where the commercial element is less than 25% are eligible). This will be an important change for developers, who may begin to construct mixed-use buildings with larger commercial elements, so as to avoid enfranchisement rights arising.

What’s not in the Bill?

With the vast majority of houses having no shared space or otherwise any requirement for communal management, there is no real justification for new build houses to be sold on anything other than a freehold basis. Many would say that developers use leasehold houses as a mechanism to extract additional funds from leaseholders through ground rents, lease extension premiums or enfranchisement further down the line. Prior to the publication of the Bill, it was widely expected that this would prohibit the sale of new leasehold houses, but this has not made it into the draft. However, it could still be introduced through later amendments before the Bill is passed.

The other major omission at present is in relation to capping the ground rent for existing leases. The problem of ground rents which double or otherwise significantly increase over the lifetime of a lease has been another widely publicised issue, with many leaseholders unaware at the time they purchased their properties that they would be liable for significant sums in the future. A ban on ground rents for new leasehold properties was introduced in 2022, but this doesn’t apply to existing lease. However, the government is currently undertaking a consultation on restricting ground rent for existing leases, and the Bill is likely to be amended to reflect the outcome of the consultation in due course.

Freeholders and leaseholders can contact our property litigation team for advice if they have any queries about the impact of the upcoming changes on their portfolios.