COMMENT The government’s latest update on the Leasehold and Freehold Reform Act 2024 has done little to provide leaseholders with the certainty they have been looking for. Nor does it provide freeholders or the valuation industry with any degree of clarity on timings or positioning. The announcement only seems to confirm what we all already knew, and that is that the task of reforming leasehold is huge and complex.
Delivering on the 2024 Act’s promises
The 2024 Act was rushed through during the wash-up period following Rishi Sunak calling a general election for July.
Speeding through legislation, which would normally take months to go through the House of Commons, the House of Lords and committee stage, is often fraught with challenges, but particularly the case here, with the government now flagging “serious flaws” with the legislation that requires additional primary legislation before they can be implemented.
The government has prioritised elements of the Act that relate to building safety measures, including remediation contribution orders and remedial orders that can be used for interim measures, such as waking watches.
Leaseholders are left thinking the government is kicking the can down the road and they would be within their rights to think so. For seven years leaseholders have been waiting for substantial reform and they are now being told to wait a little (or a lot) longer – the timeline is still ambiguous.
The two-year rule, which means leaseholders have to wait until they have owned a property for two years before exercising their right to extend their lease or buy the freehold, is set to be scrapped in January. In reality, the two-year rule has never been much of a hindrance as sellers are able to serve lease extension notices as part of the sale and the buyer can be assigned the benefit of them when they complete their purchase and continue with the lease extension process.
There is one other element of the 2024 Act that will be implemented next year, without further consultation. The right to manage provisions set out in the Act, including extended access, costs reform and voting rights, will come into force in spring 2025. This will enable more leaseholders in mixed-used buildings to take over management from their freeholders.
Everything else will be subject to further consultation. This means alongside the consultation on the Act’s ban on buildings insurance remuneration (where landlords, property managing agents and freeholders charge through the service charge) tabled this week, the Act’s provisions on service charges and legal costs, and the valuation rates used to calculate the cost of enfranchisement premiums will also launch in the new year.
Enfranchisement and valuation
On the last point I suspect those that work in the enfranchisement industry would like to see a decision of some sort promptly on the valuation issues. This would support the sector – which is largely on pause, and has been for several years – and mean leaseholders can extend their leases and move on.
The new valuation process is one of those measures that is not going to be looked at until the “serious flaws” in the 2024 Act are fixed. This includes changes to deferment rates and capitalisation rates, which are relevant for calculating lease extension valuations. The deferment rate is the discount rate applied to calculate the present value of a property at the end of a lease and the capitalisation rate is the interest rate applied to calculate the loss of the landlord’s rental income when the rent becomes a peppercorn in the new lease.
If the rates decrease under the 2024 Act, then the premium payable for a lease extension will be more, and if they increase then the premium will be less.
A quick decision looks unlikely however, unless they resolve to simply scrap the proposals to change the valuation basis of lease extensions and continue with the status quo. With the pending human rights challenges to the Act now initiated, those in the industry may not be able to hit the play button for some years yet.
Yet another Bill
As well as consulting on elements of the current Act, tabling primary and secondary legislation, the government has recommitted to publishing a new draft Leasehold and Commonhold Reform Bill in the second half of next year. This is the wholesale reform leaseholders are interested in seeing, with the Bill’s central focus being a reinvigoration of commonhold through a comprehensive new legal framework.
This undertaking will be significant and complex, as a shift to commonhold will not just be a huge legislative change, it will also mean changes to mortgages, insurance, conveyancing, and property management.
With the relatively new regulation and liabilities that are now imposed on landlords under the Building Safety Act 2022 meaning directors of companies which own their freeholds face personal liability and possibly criminal sanctions if they do not discharge their duties under the 2022 Act, this change may not be welcomed by the flat owners, who will be compelled under the commonhold proposals to be the owners of the building and take on these responsibilities in addition to the many other obligations they will have in running a residential block of flats.
For now, the position is still uncertain, the timing is uncertain and the eventual drafting of the legislation is uncertain. Leaseholders and freeholders are in the same position they have been in for many years. There are no quick and easy answers to any of the issues that have slowed up the legislation to date; if there were we would no doubt be a lot further forward.
Lucy Barber is partner and head of residential property at Forsters
