Hot Topic Highlight – Government Residential Leasehold Reform

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What is this week's blog about?

In this week’s blog, we look at the Government proposals to reform residential leasehold tenure. This is essential reading for RICS APC and AssocRICS candidates with any involvement in residential property.

What is the background to the reform?

In July 2020, the Law Commission published three reports relating to residential long leasehold reform:

• Buying your freehold or extending your lease;
• Exercising the right to manage;
• Reinvigorating commonhold; the alternative to leasehold ownership.

A summary report is available here.

The aim of the proposals was to make leasehold home ownership fairer and more secure for occupiers in England and Wales. The costs of extending a residential long lease, combined with expensive escalating ground rents have been political hot topics recently and the focus of media attention. These issues can cause problems when leasehold properties are bought or sold.

Currently, under the Leasehold Reform, Housing and Urban Development Act 1993 leaseholders of flats can extend their leases at a zero ‘peppercorn’ ground rent for an additional 90 years on top of the existing unexpired term. There is no limit to the number of times the lease of a flat can be extended. There may be substantial costs associated with lease extensions, in addition to the compensation payable to landlords in relation to the loss of ground rent, the delayed reversion and marriage value to reflect the increase in the combined value of the new interests.

The rules for leasehold houses are slightly different, but similar issues are encountered. Under the Leasehold Reform Act 1967, leaseholders of houses can extend their lease for an additional 50 years on top of the existing unexpired term. However, this right can only be exercised once. Ground rent is payable under the new lease and may be significantly more than the ground rent under the original lease.

What proposals have been announced?

In January 2021, Housing Secretary, Robert Jenrick, announced how some of these proposals will be implemented.

This includes a new legal right for leaseholders of both flats and houses to extend leases by 990 years at zero ground rent.

Furthermore, payment of marriage value from the premium calculation will be abolished, set calculation rates will be established and leaseholders will be able to voluntarily agree a restriction on future development to avoid paying ‘development value’.

Grounds rents for all new retirement properties will also be set at zero by law.

What is commonhold and what changes are being made?

Commonhold tenure is a form of freehold ownership introduced by the Commonhold and Leasehold Reform Act 2002. A commonhold association will be formed between the unit holders to own and manage the rest of the building or estate. Commonhold was created as an alternative to long residential leasehold tenure, providing more flexibility over ownership and without any limit on the length of occupation, but take-up of Commonhold has been extremely low.

As part of the reforms, a Commonhold Council, including various leasehold groups, industry bodies and Government, will be created to prepare the market for anticipated increased use of commonhold tenure, with further announcements expected in due course.

Additional explanation of commonhold can be accessed here.

How will the proposals be legislated?

A two stage process is proposed for legislating the changes. Stage one is to introduce legislation through the next session of Parliament in relation to ground rents. Stage two will relate to the remainder of the recommendations of the Law Commission, including the changes to commonhold in an attempt to reinvigorate take-up of this tenure.

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N.b. Nothing in this article constitutes legal, professional or financial advice.