What are the potential implications of the Leasehold Reform Bill for landlords and leaseholders?

In May this year, secretary of state, Michael Gove, proposed limits on ground rent as another reform to the leasehold system. So, with proposals on lease extensions and enfranchisement combined with other measures, how have we got here, and what might be in the pipeline?

Both the Conservatives and Labour included leasehold reform in their last manifestos. Labour has even said that it will abolish leaseholds within its first 100 days in office if elected. The Conservatives seemed to hint that they were going to abolish leaseholds, but have pulled back.

Phase one of The Leasehold Reform (Ground Rent) Act 2022 came into force last year. Phase two, which will focus on the gnarly subjects of existing ground rents, enfranchisement, and lease extensions, is under discussion and is scheduled to be thrashed out in Parliament in the autumn.

There are undoubtedly disadvantages for leaseholders in the current system. Initially, Gove proposed the scrapping of the leasehold system altogether with the commonhold system being favoured, whereby the leaseholders themselves in effect control and own their own freehold. There are examples of other countries that use a similar system.

However, we have seen real problems both abroad and in the UK, where apartment blocks are owned by the tenants. Not all tenants want to spend the same amount of money on a building, or can afford to do so. Self-interest can understandably play a large part, for example, a ground floor flat owner will be reluctant to contribute towards the cost of replacing a lift.

The government has since backtracked from its ambition to replace the leasehold system, citing that new legislation on reform is complex and its abolition would make the system even more so.

However, we are still likely to see reforms on ground rent, lease extensions, and enfranchisement, comprising the following:

• Ground rent will be limited to 0.1% of the property’s value
• The calculator that quantifies how much it will cost the leaseholder to lengthen a lease will be changed to work more to the leaseholder’s advantage
• Additionally, marriage value, which can be charged in cases where  leases under 80 years are extended, will be abolished
• There will be an ability for the leaseholder to buy out the ground rent and not extend the lease if the leaseholder is unable to afford both
• Allow 990-year lease extensions instead of the current 90-year

The lease extension calculation and marriage value measures may well be challenged on human rights grounds. It seems hardly reasonable for landlords who have built up a property portfolio over time, for its value to be reduced in this way. From a landlord’s perspective, a proportion of these tenants knew exactly what they were taking on.

So, what should be the priorities for leasehold reform? It would be fair to say that in some cases ground rents have been abused by landlords and there should be a cap on them. However, leasehold enfranchisement is not currently high on the electorate’s agenda with the cost-of-living crisis, the NHS and the economy topping peoples list of concerns.

One of the biggest concerns for our leaseholder clients now are large service charge bills, not least because of the cladding crisis. It would make sense to put greater obligations on the freeholders and their managing agents to provide as much information as possible,  as quickly as possible about the likely cost, for example of replacing dangerous cladding, and on lawyers to explain the risks.

A government fund should be made available for leaseholders who are not able to afford these bills, which would allow them to stagger the repayment over several years at modest rates of interest. This would also ensure that those freeholders not able to recover the cost elsewhere and must rely on their service charge, have the funds in advance without having to sue leaseholders, and can carry out what are critical works.

More generally speaking, many leasehold issues could be resolved by requiring a standard form of lease to be used across the sector, similar to the Law Society’s conveyancing quality scheme, which requires its members to use its standard form contract. When this first came in there were many raised eyebrows, but it is now used almost universally. The lease could be fairly balanced between the leaseholders’ right to enjoy their own home and protecting the building and other leaseholders. Amendments would only be permitted where these are necessary for a particular scheme.  It would also reduce conveyancing costs as there is less to agree and there would be less to litigate.

As for what landlords can do now to prepare for the forthcoming leasehold reforms, it would make sense to complete any leasehold extensions as quickly as possible while there is certainty, and ensure through working with their legal advisors they are up to date on leasehold legislative changes as these progress.

Nicola Kravitz is head of real estate and private client at law firm Memery Crystal