At long last, reform is on the horizon in the form of the Leasehold and Freehold Reform Bill. Michael Gove is confident the Bill will be passed before the next general election, but will it be the answer to leaseholders’ prayers?
As the Building Safety Act 2022 has shown, even once a new Act is passed the future can look rather shadowy as users try to work out what it actually means. Property practitioners will need to keep their wits about them this year to make sure they are up to date with the latest innovations.
Leasehold and Freehold Reform Bill
The Bill runs to 140 pages. While the reforms broadly reflect the Law Commission’s proposals for making it easier and cheaper for leaseholders to extend their leases, acquire their freehold or obtain the right to manage, some new provisions relating to service charges have sneaked in too. What the Bill does not do is abolish leasehold or embrace commonhold, as many lobby groups wanted. Nor does it ban the creation of new leasehold houses, although Conservative MPs have already promised to amend the Bill, not only to include a ban covering new houses but to extend it to new-build flats.
The Bill introduces a new methodology for calculating the price payable for a lease extension or freehold acquisition. Most significantly, marriage value will be abolished and the government will prescribe rates (for example, the deferment rate) which will make it easier to calculate the price. No doubt the level at which these rates should be set will be hotly debated.
The surprise entry into the Bill is the proposed new requirements in relation to the administration of service charges. One might have thought there is already rather a lot of regulation of service charges, but it seems the politicians are clamouring for yet more. The Bill prescribes a new form of service charge demand and standardises the form of service charge accounts. There will also be an implied term in every lease that service charge accounts must be provided within six months of the end of the service charge year, together with a service charge report. Hopefully, these measures will tackle the unhealthy practice of charging rolling interim charges which are not reconciled for years on end.
If the landlord fails to comply with the new requirements, the tenant can apply for an order for specific performance and damages of up to £5,000 with the existing criminal sanctions being abolished. Landlords will also be banned from passing on litigation costs via the service charge, whereas tenants will have a right to claim their costs from the landlord. I suspect these provisions may be watered down when it is realised that lessee-owned landlords – which usually have no assets – will be unable to maintain the building if they cannot enforce the service charge covenants.
The question of whether to cap or abolish ground rents for existing leaseholders has also been out for consultation. Traditionally, ground rents have been a modest annual sum, but in recent years developers have introduced escalating ground rents, often rendering flats unsaleable. While the abolition of grounds rents is politically attractive, the government estimates that the cost to freeholders (which include pension providers and lessee-owned companies) would be in the region of £5bn.
As with the rest of the new legislation proposed, there is an inevitable risk that it will be held up or amended by a challenge under the Human Rights Act 1998 (Article 1 of the First Protocol of the European Convention on Human Rights). There is, of course, also an election looming. Labour has pledged that, if it gets into power, it will put an end to leasehold on new flats and make commonhold the default tenure for all new properties. The current form of the Leasehold and Freehold Bill may not, therefore, be the last word on the matter.
Renters (Reform) Bill
Change is also afoot for short-term renters, but perhaps not as soon as was first anticipated. The headline-catching reform is the abolition of so-called “no-fault” evictions under section 21 of the Housing Act 1988. The Bill recognises that there are sometimes legitimate reasons for a landlord wanting its property back – for example, antisocial behaviour or because the landlord needs to live in the property. However, the government has announced that section 21 is here to stay until “sufficient progress” has been made in reforming the courts system. So unless or until there is a change of government, I think we can safely say these proposals will not become law in 2024.
The Building Safety Act 2022
This Act, with 171 sections, 11 schedules and 19 sets of regulations to date, is not for the faint-hearted. Even the “explanatory notes” are 408 pages long. Anecdotally, many solicitors have decided not to take on the conveyancing of flats in buildings caught by the 2022 Act at all on the grounds that it is just too risky.
So far, not many cases have reached the tribunals, so there is very little judicial interpretation of the 2022 Act available. The tribunals are, however, braced for an influx of cases in 2024 as leaseholders become more aware of their rights. In the meantime, attempts have been made to close off loopholes in the existing legislation – see, for example, the recent introduction of the concept of a “connected replacement lease” by the Levelling-up and Regeneration Act 2023, so that lease extensions are not treated as new leases for the purposes of the 2022 Act.
Residential landlord and tenant law has become a hot topic in recent years, and the proposed changes are finally coming to fruition. 2024 will be a busy year as we all get our heads around the changes.
Nicola Muir is a barrister at Tanfield Chambers
