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Share Article: New World Order in Leasehold and Collective Enfranchisement

On Friday 24 May 2024 we saw the Leasehold and Freehold Reform Act 2024 (“the Act”), hastily rushed through Parliament in the dying hours of the last session.  Truth be told, I did not think it would make it onto the statute books in this session given the impending election, which was announced only 2 days earlier.  The much-debated Renters Reform Bill did not make it.

It has been decades since there has been any substantial reform to the right to collectively enfranchise or extend a leasehold interest.  In that time, social attitudes have changed substantially to the right to own and govern your own home.  For example, in 1967 when the Leasehold Reform Act (giving those with leasehold houses the right to enfranchise or extend their leases) came into effect, nearly a third of the English population lived in social housing but this has dropped substantially since then and the number of owner occupiers has increased.   

The proposal to reform leasehold ownership was made in the Conservative party’s general election manifesto when it was stated that they were committed to cracking “down on unfair practices in leasehold”.  Following this, there were various consultations, views sought from the Law Commission and the coming into force of the Leasehold Reform (Ground rent) Act 2022 restricting grounds rents for new houses and flats to one peppercorn.  In the Kings speech on 7 November 2023 it was announced that the Government intended to introduce a “leasehold and freehold bill” and on 27 November 2023, this was introduced into the House of Commons.   Over those years, the content of the reforms have been hotly debated.  

Now that the Act has received Royal Assent, what does it provide and when will it be in force?  

What does the Act provide?

The Act is substantial and covers various areas involving property with leasehold interests such as the requirement for landlords who manage their own properties to belong to a redress scheme and further amendments to the Building Safety Act 2022, as well as lease extensions and collective enfranchisement. 

The important elements of the Act in so far as collective enfranchisement and lease extensions are concerned:

  • No new leasehold houses can be created.
  • Lease extensions can now be 990 years on top of the unexpired term.  This is an increase from 90 years on top of the unexpired term.
  • Where the building is mixed use, the commercial element has been extended from 25% of the floor area to 50% of the floor area, thereby opening up the ability to enfranchise more mixed-use buildings.
  • You no longer need to own the property for a period of 2 year before being able to extend your lease.
  • Freeholders are to pay their own costs in the enfranchisement/lease extension with the exception where the claim is of a low value.
  • Marriage value has been scrapped.  This relates to leases where there is less than 80 years of the term left.  In simple terms this is the sharing between the landlord and tenant of the increase in the value of the property following completion of the lease extension, reflecting the additional market value of the longer lease.
  • Deferment rate is to be prescribed.  In layman’s terms, the Deferment Rate is a percentage used to calculate the amount of compensation payable to the landlord to extend the lease.  It is the value of a landlord’s benefit if it were to gain possession of the property at the end of the term.  
  • Capitalisation/yield rate is to also be prescribed.  This is the value of the Landlord’s ground rent over the course of the lease.

The last above three points will have a significant affect on the premium payable by the tenant to the landlord.

Although the removal of marriage value will reduce the premium, if the deferment and capitalisation rates are low in relation to those properties where there is more than 80 years remaining this could result in higher premiums for those with more than 80 years left on their leases.  It has been suggested that the deferment rate could be 3.5%.  This will be contentious especially if it moves away from the Sportelli rate (deriving from the case of Earl Cadogan v Sportelli [2008]) which is 5% for flats and 4.75% for houses.  The higher the deferment rate the lower the premium.  These rates are to be reviewed by the Secretary of State every 5 to 10 years.

When will it be in force?

Currently, we do not know when the majority of the Act will come into force and what the deferment and capitalisation rates will be as they are yet to be prescribed by the Secretary of State which requires statutory instruments.

However, paragraph 82 of the Impact Assessment report dated 8 December 2023 estimated that certain parts of the Act will come into force in 2025 to 2026 whereas others will come into effect by 2028.  There was also a letter dated 15 April 2024 from the Baroness Scott of Bybrook, (the Parliamentary under Secretary of State for Social Housing and Faith, Department for Levelling Up, Housing and Communities) which stated that the Act would commence “as soon as reasonably possible after the Bill receives Royal Assent so that all leaseholders extending their lease or acquiring their freehold can benefit from these reforms…

Given that certain sections of the Act require statutory instruments, that there may be consultations before the statutory instruments are finalised, and that there is an impending general election, it is unlikely that this will come into force for some many months, if not years. 

If you have any issues relating to lease extensions or collective enfranchisement, please contact a member of our Dispute Resolution team.

Mira Arezina
Partner

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