In his address to Parliament on Tuesday 7 November, King Charles III confirmed (as anticipated) that the government’s proposals for the next year include:
1. Reforms to the housing market:
To “reform the housing market by making it cheaper and easier for leaseholders to purchase their freehold and tackling the exploitation of millions of homeowners through punitive service charges.”
2. Reforms to the rental market:
So that “renters will benefit from stronger security of tenure and better value whilst landlords will benefit from reforms to provide certainty that they can regain their properties when needed.”
Prime Minister Rishi Sunak fleshed out the reforms in his supporting statement.
What do we know so far?
Leasehold and Freehold Bill
The changes that are either proposed or to be consulted on include:
- longer lease extensions: increasing standard lease extensions from 90 to 990 years.
- simpler lease extensions: scrapping the two-year ownership prerequisite.
- cheaper lease extensions: scrapping “marriage value” (understood by few, paid by many) to reduce the cost of lease extensions.
- cheaper leases: capping ground rents in existing leases and increasing transparency in service charges.
- fewer leases: banning leasehold houses (but not leasehold flats, as yet).
- simpler freehold purchases: making it easier for leaseholders to buy the freehold to their building.
- more qualifying mixed-use buildings: allowing leaseholders in mixed-use buildings with up to 50% (rather than 25%) non-residential floor space to buy the freehold or manage the building.
Renters (Reform) Bill
The proposals include:
- banning fixed-term tenancies, moving to periodic tenancies that run until terminated.
- restrictions on rent increases.
- limiting landlords’ discretion in ending tenancies by abolishing the section 21 process.
Compensated by widening the grounds on which landlords can apply to court for an order to end the tenancy. More detail can be found in our previous article.
But, with the increased pressure this puts on the court system, the proposals acknowledge that court reforms must come before renter reforms.
Do I need to know about this?
The chances are you do if you:
- market or let out…
- lend money secured on…
… residential flats, leasehold houses, mixed-use properties or rental properties (including second homes).
What does this mean?
It is estimated that:
- leasehold properties make up around 20% of the housing stock in England.
- around 1.5 million leasehold houses fall directly into the scope of the government’s proposals.
Developers and owners of residential and mixed-use properties will need to consider the ownership structure of their property assets and factor in the loss of ground rents.
Owners and purchasers of mixed-use buildings will need to review whether statutory rights will now apply to their buildings.
Leaseholders are expected to find it easier to extend leases and buy the freehold once the reforms come in. Over time, fewer lease extensions will be needed.
Until then, leaseholders may need to make strategic decisions about when to extend their lease.
Intermediate landlords may find that they are no longer able to grant lease extensions. After all, how can a landlord who is a leaseholder themselves grant a 990-year lease if their lease “only” runs for 250 years?
The aim is to:
- make it harder for landlords to evict tenants who are not “anti-social”; and
- give those tenants more security.
Landlords will have less discretion when to end tenancies but Landlords will benefit from more statutory grounds on which they can end tenancies.
It is interesting that the involvement of the courts in the process for terminating residential tenancies is increasing just as we approach the 20th anniversary of the (indirect) reduction in the involvement of the courts in the process for terminating commercial leases. Gone are the days of seeking a court order to exclude commercial leases from statutory protections.
The industry debate has already begun. The government will carry out various consultations on the changes. If you want your voice to be heard, look out for future announcements. On 9 November the government opened its 6-week consultation on “Modern leasehold: restricting ground rent for existing leases”.
In the longer term, much will depend on the next election, to be held within the next fifteen months. However, both the existing government and the opposition are championing fundamental reforms to the leasehold system.
Change is on the cards.