Most people involved with property will have some awareness of the government proposals to amend the existing Leasehold Reform laws. This paper aims to provide a brief summary of the situation so far, and consider the commercial impact on the general market and statutory premiums together with a picture for the future.

The Proposals

Since 2016 there have been a number of consultation exercises, Law Commission reports and government announcements about potential Leasehold Reform. Arising from all of that came an announcement in the King’s Speech in November last year of a proposal to introduce reforms to make things ‘easier and cheaper’ for tenants to extend leases and enfranchise as well as provide increased transparency and tenant’s rights in regards to service charge and management. This was followed up by the publication of the Leasehold and Freehold Reform Bill later that month, which has subsequently been making its way through various Parliamentary stages (House of Commons and House of Lords).

The main headlines of the draft legislation are (together with the amendments proposed to date by Parliament (House of Commons and/or House of Lords):

  1. The removal of marriage value from the premium payable to the landlord.
    This is only relevant where the unexpired terms of any lease is less than 80 years. Its removal generally halves the premium in those cases.
    Amendments have been proposed during the ongoing passage through the House of Lords to reinstate marriage value for flat owners who already have less than 80 years unexpired.
  2. Cap ground rent compensation.
    The original draft proposal was to cap this at a sum reflecting 0.1% of flat value, a public consultation over five options (caps at £0, £250, the original rent, 0.1% of flat value, and the passing rent) and Mr Gove publicly announced his preference to a £0 cap.
    We understand the government have accepted guidance from the Treasury that £0 cap is unrealistic due to the risk of an expensive challenge by landlords for loss of value (estimated at £27bn by the government’s own impact assessment figures). More recently there have been strong rumours that a cap at £250 is most likely (which the government’s impact assessment figures show at a £15bn loss for landlords). Amendment has been proposed to remove any cap.
  3. Prescribe rates for the calculation of ground rent compensation (capitalisation rate) and reversionary compensation (deferment rate), with such rates set by the Secretary of State and reviewed at least every 10 years.
    There is no information to date on the actual rates under consideration.
    For capitalisation rate it is interesting to note that governments compensation figures use a yield of 3.5%, which looks low by the current market conditions (partly due to prevailing bond and interest rates), or high by market conditions prevalent a few years ago.
    For the deferment rate there have been proposed amendments in both Parliamentary Houses to set the rate ‘having regard to the desirability of encouraging leaseholders to acquire freeholds at the lowest possible cost’.
  4. Remove compensation payable to landlords for loss of development value (e.g. roof space).
    Amendment has been proposed to limit this for where the enfranchising tenants agrees not to undertake any development for 10 years’ post-enfranchisement.
  5. Amendment has also been proposed to extend the development value exclusion into any adverse valuation effect on any neighbouring properties owned by the same landlord.
    Removal of landlord’s costs being reclaimable from the applicant tenant. This is for all situations except where the premium figure is less than the costs.
    Amendment has been proposed to remove this low value exception.
  6. Increasing the new lease term to from an addition 90 years to an additional 990 years.
  7. Treatment of superior landlords and freeholder as merged for valuation purposes when assessing premiums.
  8. Allow intermediate landlord to impose a reduction in head rent to match the loss of ground rent from a flat in extension claims.
  9. Introduction of online calculator to assess the premium payable for lease extension or freehold enfranchisement, with the idea it should be relied on by both sides unless there is a genuine dispute, which would be resolved by Tribunal.
  10. New tenants right to buy out just the ground rent for cases where the unexpired term is more than 150 years.
    Amendment has been proposed to remove this 150-year minimum limit.
  11. Remove the 2-year ownership period for qualification for lease extension for flats, and enfranchisement for houses.
  12. Removal on restriction and qualifying period for repeat claims.
  13. Requirement for freeholder to take leasebacks for non-participating and non-qualifying flats and commercial elements, thereby removing the funding gap faced by participating tenants who would otherwise have to pay for these.
  14. Change to building qualification for both enfranchisement and RTM. This includes increasing the maximum commercial element to 50% from the current 25% and extending Right To Manage (RTM) and Tribunal appointed managers rights to cover whole estates. Amendment has been proposed to increase this commercial limit to 75%.
  15. Removal of landlord’s ability to recover legal and Tribunal costs via service charge when defending a tenant’s challenge for alleged poor practice.
  16. Set maximum time limits and fees for landlord response to pre-sale enquiries.
  17. Increase transparency on service charge costs, including standardised demands and annual reports.
  18. Reform of buildings insurance commission charging by landlords.
  19. Extension of cost transparency to estate charges, with new rights to challenge for tenants.
  20. RTM rights for estates and Tribunal appointed managers.

In addition to the above other amendments or new matters proposed to date during the current passage through Parliament are:

  • Ban on sale of new leasehold houses.
  • Extension of enfranchisement qualification to mixed use buildings with shared services.
  • New compulsory share of freehold right for flat purchasers on all future new build blocks.
  • Removal of landlord’s right to forfeiture for covenant breach by tenant.
  • Extension of RTM rights to Housing Association and Local Authority owned / run blocks.
  • Reduction in the threshold for change of building from freehold/leasehold to commonhold from 100% of tenants to 50%.
  • BSA qualification extending to all buildings (i.e. not restricted to minimum height / storeys).
  • Extension of BSA financial contributions for tenants with more than one flat, subject to a wealth test.
  • Removal of non-qualification for enfranchisement of more than two flats in a block.

Bill Progress

Set out below is the stages of progress together with dates of completion so far:

House of Commons:

First reading – 27/11/2022
Second reading – 11/12/2023
Committee stage – 16/01/2024
Report stage – 27/02/2024
Third reading – 27/02/2024

House of Lords:

First reading – 25/02/2024
Second reading – 22/02/2024
Committee stage – 22/04/2024
Report stage – ongoing, expected 05/06/2024
Third reading – yet to start

Final Stage:

Consideration of amendments – yet to start
Royal assent – yet to start

This is a relatively fast pace which suggests the urgency and importance that has been placed on leasehold reform by the government. Part of this speed is likely to be the result of the requirement to have a general election before the end of 2024. Many political commentators are putting their money on an autumn date. If that is correct then, with Parliament due to rise on the at the end of July 2024, and the logical requirement to have a new bill in place before then, it does mean time is tight to get the new Bill through.

We are aware of strong and ongoing lobbying by landlord groups (e.g. London estates, national estates, pension funds, charities, insurance companies, and large private ground rent investors), whose particular target has been to soften some of the proposals that more directly affect their investment values (marriage value removal, ground rent cap, landlord costs removal, prescribed rates and qualifying building change to 50% commercial).

The threat of challenge from landlord investor groups for compensation remains real. We are aware of mixed legal opinions over the potential success of challenges. It may be that the existing government take the view that it is politically better to bring in the new legislation ahead of the general election and then leave a new Labour government to pick the pieces and costs of any such challenges.

General Market Effect

Investors in residential freeholds are typically focused on three elements: ground rent income, reversionary returns (including realising marriage value) and development value (in particular roof spaces). Prior to the Kings Speech the market values for freeholds had generally softened: for ground rent and development value partly due to general market conditions; for ground rent and reversionary returns partly due to concerns about future legislative change. Since the King’s Speech the market has suffered significant further softening as some small landlords have sought to divest their freehold investments and appetite amongst buyers has evaporated.

Whilst a general overview only, it is our general experience that changing market values of different elements of value within a residential freehold (using notional figures starting at “100” in 2017) have been as follows:

  • Ground rent: 100 at 2017, 75 at summer 2022, 50 now
  • Reversionary returns: 100 at 2017, 90 at summer 2022, 70 now
  • Development: 100 at 2017, 70 at summer 2022, 25 now

Effect on Premiums to date

The fact that all lease extension and enfranchisement claims to date have been made under the existing legislation and no new legislation (is yet) enacted, means that fundamentally the premiums payable for all existing and recently agreed claims are set against the existing legislation. Nevertheless, some ‘soft’ deals have been agreed by landlords, particularly where terms are less than 80 years. These deals have informally reflected as smaller share of marriage value than the current 50% entitlement, with a discount typically of between 5% and 25%. However, we are aware that large London estates and large independent landlords have generally not been agreeing soft deals and understand that is in part because they do not wish to prejudice potential future compensation claims against the government should the draft legislation be enacted in its current form.

Soft deals have not been prevalent in cases with onerous ground rents. We expect partly that is because the relatively modest premiums involved and the fact that tenants in such circumstances are likely making a claim with the time pressure from refinancing or imminent sale and are therefore not prepared to take matters to Tribunal. Further, there is an open question as to whether the shadow blight found in the general ground rent market arising from both general government announcements and specifically the publication of the bill form part of what is known as the ‘Act world’ disregard that applies for the purpose of premium calculations.

We are also aware that there are a number of live enfranchisement cases where premiums have been agreed but completion is being delayed to, and in some cases beyond, the usual 4-month limit so as to buy the tenant more time to see if any, what form and when any legislation comes in so thereby allowing them the option of potentially withdrawing from the agreed deal and then serving a new claim to take advantage of favourable legislative change.

Consequences of Reform

Both sides (landlord and tenant) have painted a post-reform picture favourable to them. As we see it, the basic likely consequences from enactment of the draft legislation in its current form would be:

  • The transfer of wealth from Landlord investors (due to lower extension / enfranchisement premiums) to Tenants (through the increase in value of flats). This Tenant group is made up partly of owner occupiers and partly of investors (buy-to-let landlords).
  • Some house price inflation due to the increase in values of flats (and houses) with short leases or onerous rents.
  • Withdrawal of investor landlords from the market (either voluntarily or through insolvency).
  • An increase in numbers of tenant owned freeholds, either as a result of landlord voluntary sales or enfranchisement.
  • Geographically disproportionate impact with more properties benefitting to a greater extent in high value areas (London and the south east) compared to other areas.
  • Overall limited immediate affect for tenants as only a modest proportion of the existing 5 million leasehold properties have short leases or onerous rents.
  • A change in development types with increase in commercial element (to get above 50%) to ensure landlord control of freehold
  • An increasing risk of short-term and long-term service charge shortfall, particularly for tenant owned freeholds, due to removal of litigation and legal advice cost recovery.

Maunder Taylor have extensive experience in residential lease extensions and enfranchisements as well as market valuations of freeholds of blocks of flats. Should you wish to discuss our service or your particular requirements in more detail, then please contact:

020 8492 5523 / 07759 900 105