The Future of Leasehold – A Practitioner’s Thoughts
Leasehold is evolving. We are all watching with interest to see the full impact of the changes proposed by the Law Commission, the Leasehold Reform (Ground Rent) Bill and the recent announcement of the Competition & Markets Authority (CMA) concerning the banning of doubling ground rents by Persimmon and Aviva.
The statutory procedure for extending leases of flats and houses, the collective enfranchisement of flats, and the acquisition of the freehold of houses, are complex, time-consuming and expensive. There is no standardised form of prescribed notice to initiate the claim. Costs are not fixed. The procedure can be cumbersome. The premium is unknown and subject to negotiation. The qualification criteria for leaseholders entitling them to exercise their statutory rights is not uniform. Voluntary lease extensions and freeholds negotiated outside of the statutory regime can be a trap to the unwary leaseholder and can result in a property being unmortgageable or unsaleable.
On 7 January 2021, the Ministry of Housing, Communities & Local Government (MHCLG) released a statement claiming that “Government reforms [will] make it easier and cheaper for leaseholders to buy their homes.” This follows reports from the Law Commission on the options to reduce the price payable, published in January 2020, and its report on enfranchisement, commonhold and right to manage, published in July 2020. The wheels are now very much in motion to change leasehold. Following the Queen’s Speech in May 2021, we now see the Leasehold Reform (Ground Rent) Bill working its way through the various stages in Parliament.
The Bill seeks to abolish ground rent in all “new” leases. It remains to be seen the extent to which the Government will abolish ground rent on leasehold properties. Will the sale of new leasehold houses be abolished in accordance with previous manifesto pledges as part of the proposed Bill? Will this apply to voluntary lease extensions that seek to impose a ground rent for the extended term? It will certainly be interesting to see whether adverse ground rents in existing leases are tackled now, or whether they will form part of the latter anticipated leasehold reforms expected in the future.
It should be noted that this future legislation will not be in the current session of Parliament and could be approximately two-four years away, undoubtedly to be hotly debated and subject to numerous amendments and challenges. The abolition of marriage value has been mooted but no detail provided as to how future premiums will be calculated. Is it even possible to formulate a one-size-fits-all approach by way of an online calculator to calculate the premium? In reality, is an extension of 990 years significantly different to the already available 90-year lease extension? Will Commonhold be a realistic alternative to leasehold and freehold?
It is evident that some of the prolific ground rent investor companies and pension funds as well as developers such as Persimmon and Aviva, most recently, seemingly agree that a doubling ground rent is indeed considered to be an “adverse” ground rent. However Persimmon and Aviva were original signatories to the “Public Pledge for Leaseholders” which was signed by numerous housebuilders, investors, builders, pension funds and others back in June 2019. Interestingly therefore it has taken two years to pledge in writing their commitment to leaseholders.
Will once valuable short leasehold reversions hold the same value in the future as they do now? Should a leaseholder extend their lease now or wait? Will ground rent abolition apply retrospectively to existing leases? Will there be a complete overhaul of the numerous Acts that govern leasehold enfranchisement? These are questions faced by our profession every day and we simply do not yet know the answers. We all wait with baited-breath and the devil is of course very much in the detail.
Changes are on the horizon… but it will take time.
Katie Cohen is a residential property law partner at Keystone law, specialising in all aspects of leasehold enfranchisements