For this year’s The Alan Langleben Memorial Blog Competition, held in the run-up to the surprise general election announcement, the Property Litigation Association challenged its members to tackle leasehold reform, as the landscape then stood.
The topic was as follows: “Everyone has a right to a decent home” (Michael Gove, white paper A fairer private rented sector). The government has proposed a raft of reforms to residential property legislation, designed to overhaul the rights of both short- and long-term leaseholders. But could such reform give rise to unintended consequences that destabilise these sectors and squeeze the supply of affordable housing stock? Discuss.”
Connor Rutherford, trainee solicitor at Forsters, claimed the first prize of a trophy, £2,000 and publication in EG, and received the award last week at the PLA’s joint summer party with the Property Bar Association.
The judges said: “His blog is logical and coherent and points out that although, in respect of the Leasehold and Freehold Reform Bill, the legislators seem to be moving us towards commonhold, there are no suggestions/provisions as to approach and implementation.”
The runners-up were Jack Crown, associate in the property and housing litigation team at Russell-Cooke, and Rooshan Saeed, senior paralegal in the housing and property disputes department at Anthony Gold Solicitors.
Since the blog competition was held, the Leasehold and Freehold Reform Act 2024 has received royal assent.
The winning entry
Connor Rutherford, trainee solicitor at Forsters
On 24 July 2023, Michael Gove announced the government’s long-term plan for housing in England. Central to that plan were two principles: that the government would provide “a new deal for tenants and landlords”, and that it would establish a framework for “liberating leaseholders”.
A year on, those principles have been captured by two parliamentary Bills with huge significance for short- and long-term leaseholders. The Renters (Reform) Bill and the Leasehold and Freehold Reform Bill both set out to address a dearth of recent legislation directed towards the housing crisis in England. Indeed, 15 housing ministers have come and gone since 2010, all against a backdrop of falling home ownership, rising homelessness and shortfalls in housebuilding targets. And yet, despite their significance, many have warned of the Bills’ unintended consequences.
The headline proposals within the Renters (Reform) Bill are the removal of fixed-term assured tenancies and the abolition of section 21 no-fault evictions. The policy considerations behind those proposals are important, to give short-term tenants greater flexibility while reducing the growth in homelessness caused by no-fault evictions. However, the proposals are not without their issues. In parliament, concerns have been raised that the removal of fixed-term tenancies will “obliterate the long-term rental market”, with landlords struggling to reliably source tenants ahead of time.
Additionally, landlords risk facing an increased regulatory burden through the Bill’s proposals to extend the Decent Homes Standard and introduce a new “Property Portal”. In response, many landlords have left the rented sector or increased rents, squeezing the supply of affordable housing in the process.
Further, the government has indicated that it will not abolish section 21 until the court system has been reformed to bear the added strain that the proposals may cause. The shadow housing minister has criticised this decision, remarking that section 21 reforms are being “kicked into the long-grass”.
The reforms put forward by the Leasehold and Freehold Reform Bill are no less important. The Bill makes it easier for leaseholders to extend their lease, to buy the freehold and to take over the management of their building. It also proposes to remove marriage value from the statutory valuation scheme.
On the one hand, these reforms mark a significant step towards addressing, in DLUHC’s words, “the historic imbalances between leaseholder and freeholder”. On the other, they threaten to destabilise the rented property sector. For example, despite a cross-party consensus that the reforms will favour a commonhold framework of home ownership, there are no provisions within the Bill which specifically cater for a commonhold system. Similarly, the marriage value proposal has been criticised as a one-off windfall for leaseholders, which could deter landlords from operating in the sector.
Ultimately, at the time of writing, both Bills face an uphill battle to pass during parliament’s “wash-up period” before the general election. It remains to be seen whether the Conservatives will remain committed to leasehold reform if they stay in power. However, should Labour win, then there are already signs that they will progress the reforms, if not take them further.
The runners-up
Jack Crown, associate in the property and housing litigation team at Russell-Cooke
The Renters (Reform) Bill and the Leasehold and Freehold Reform Bill were meant to strengthen the rights of private tenants and leaseholders, but the corresponding impact on landlords and freeholders could have a particularly destabilising impact on the residential property market. The extent to which this happens depends on whether the government’s proposed reforms actually reach the statute book.
The pressure that the government has been under as a result of its proposals makes it easy to envisage a scenario where the statutes end up watered down. An example of this can be seen in the Deregulation Act 2015, the mechanism meant to prevent retaliatory evictions did not quite give private tenants the protection that was proposed.
The Leasehold and Freehold Reform Bill has already had proposed reforms rejected in relation to the removal of ground rents for existing leases, with a cap of £250 per annum now being proposed. The proposals to ban the sale of new leasehold houses were also not reflected in the Bill as introduced.
The headline change for the private rented sector and a key focus of the Renters (Reform) Bill was the abolition of section 21, announced in 2019. This was, unsurprisingly, met with concern by private landlords questioning how they would be able to get vacant possession of their properties. These concerns have perhaps been partly addressed by clarification of the new grounds of possession that would replace section 21.
However, a considerable amount of private landlords have sold their rental properties since 2019, which has created a shortage of properties available to rent, increased rents for properties that are still available, increased competition for those properties and increased homelessness applications based on landlords selling their properties – all in the midst of a housing crisis.
This in turn puts more pressure on local authorities who are themselves in financial difficulties as they try to source temporary accommodation which is in increasingly short supply or make private rented sector offers to homeless applicants, which can eventually lead to future homeless applications.
The position now is that the abolition of section 21 will take place after the court system is overhauled. This requires a review of the system’s capacity to handle more possession claims, as well as development of analogue systems, followed by digitisation.
Lord Carrington commented on there being an “absence of published information on the metrics of improvement” of the court system and it is fair to say that there is no clear end date or timetable for this process to be completed. The government highlighted that an array of secondary legislation will also be required to achieve the abolition of section 21.
With the prime minister’s sudden announcement of the next general election, the Renters (Reform) Bill is very unlikely to finish its journey through parliament but the Leasehold and Freehold Reform Bill looks set to get through the wash-up. It remains to be seen what action the next government will take and how this will further impact the property market.
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Rooshan Saeed, senior paralegal in the housing and property disputes department at Anthony Gold Solicitors LLP
The White Paper “A fairer private rented sector” underscores the government’s commitment to enhance the security and quality of housing for short-term leaseholders, or tenants. The next government is likely to adopt the core principles of the White Paper given the cross-party support. Concurrently, the Leasehold and Freehold Reform Bill seeks to overhaul the rights of long-term leaseholders.
While principled in its intentions, the proposed reforms warrant a careful examination of potential unintended consequences that could destabilise the housing market and impact the availability of affordable housing.
Tenants
Strengthening tenant rights, such as abolishing assured shorthold tenancies and section 21 “no-fault” evictions, may result in a reduction in the frequency of evictions, which could provide great security of tenure to tenants while providing more stability of rental income for landlords. This stability might attract a new class of investors in the private rental sector.
Further, the increased regulation could lead to a general uplift in the quality of available housing, improving living conditions and property standards.
However, increased regulation and enforcement may discourage some landlords from operating in the sector and increase costs for those who remain. This could lead to a reduction in available rental properties. Moreover, the increased costs associated with higher standards and regulations may be passed on to tenants through higher rents.
Long-term leaseholders
The Leasehold and Freehold Reform Bill intends to make it more affordable for leaseholders to extend their leases and purchase the freehold. This includes reducing the costs associated with enfranchisement and lease extensions, which can significantly benefit leaseholders financially.
Further, proposals to cap existing ground rents to a nominal amount, such as £250 per annum, could alleviate the financial burden on leaseholders.
But freeholders who rely on ground rents and extension fees as a revenue stream would face financial losses due to the proposed changes. This would lead to disputes and financial instability for those who have invested based on the current ground rent income and make residential freehold a less viable asset.
Developers might be less inclined to build properties with the intention to grant leasehold interests if the profitability of such developments is compromised by the lower value of freehold, and potential loss of freehold through enfranchisement.
This could lead to a decrease in the supply of new housing, exacerbating the housing shortage, or increase the initial cost of new leaseholds.
Conclusion
The proposed reforms appear to be more destabilising, however, with the prime minister calling a general election on 4 July 2024, uncertainty about the future of the proposed reforms is looming over all the stakeholders. Any government that wishes to pursue these reforms would have to adopt a balanced approach.
Offering incentives, such as tax reliefs or grants for property improvements, could encourage landlords to comply with new regulations without exiting the market.
By balancing regulation with measures to maintain property supply, any government can work towards ensuring everyone has a right to a decent home without destabilising the market or reducing the availability of affordable housing.
