What happens to proposed legislation when an election is called?
When an election is called, parliament is dissolved until after the election. That means no new legislation can be passed.
What does this mean for leasehold reform legislation?
The Leasehold and Freehold Reform Bill was one of 16 bills out of the list of 216 currently going through the parliamentary approval process which were considered at a final “wash up”. The Bill had its final reading before the House of Lords and became law in parliament’s final hours on 24 May.
The Renters (Reform) Bill – which had proposed radical changes to residential tenancies, including replacing assured tenancies with periodic tenancies, abolishing “no fault” section 21 evictions, and giving enhanced rights to leaseholders and imposing greater controls on landlords – was not passed into law, so it will be for a new government to decide whether to bring back the bill into a new parliament.
The challenge then, as it has been for Michael Gove and the current government, will be to first improve the County Court system to the point that it can cope with all of the court claims that landlords will have to bring under the new regime, before being able to recover possession of their properties.
Leasehold and Freehold Reform Act
The main changes introduced by the Act are:
- a ban on the sale of new leasehold houses (but not flats), other than in “exceptional circumstances” so that “every new house in England and Wales will be freehold from the outset”;
- an increase in the standard lease extension term from an extension of 90 years to an extension of 990 years at a peppercorn rent for houses and flats;
- the right for all leaseholders – not just those who have owned their house or flat for 2 years – to extend their lease or purchase the freehold. This means those selling their properties won’t need to assign the benefit of lease extension notices to the buyer;
- standardisation of service charge invoices to give leaseholders greater clarity;
- the removal of the requirements for leaseholders to pay the freeholder’s costs when making an enfranchisement claim;
- a requirement for freeholders – as well as managing agents – to join a redress scheme;
- a ban on buildings insurance commissions for freeholders and leaseholders, and the introduction of new “handling fees”;
- an increase to the “non-residential limit” to allow leaseholders in buildings containing 50% non-residential floorspace to buy their freehold; and
- changes to the calculation of the premium payable for a lease extension or freehold acquisition, in particular by the abolition of “marriage value” (which currently forms part of the sum payable by the tenant if the remaining term of their lease is already less than 80), and by capping the treatment of future ground rents in the calculation at 0.1% of the freehold value.
No cap or ban on ground rents
Ground rents had already been banned for new leases from 30 June 2022 onwards, under the Leasehold Reform (Ground Rent) Act 2022. The government had proposed to extend that ban to leases entered into before June 2022 through the Leasehold and Freehold Reform Bill, though never included those provisions in the Bill.
In tandem with the Bill’s progression through parliament, the government had launched a consultation in November 2023, setting out five options ranging from an outright ban on ground rents, to maintaining the ground rent originally agreed under the lease, to various caps on ground rents (including a fixed cap at £250 per year, a percentage of property value or freezing ground rents at the current level).
It appeared that government was leaning towards a phased ban on ground rents, capping rents at £250 per annum for up to 20 years, but the results of that consultation were never published, and the debate is now academic, as the Act does not include any provisions on ground rent. It remains to be seen whether the incoming government will pick up this reform, however, it’s clear there are no easy answers to this issue and various stakeholders have already indicated that they might seek to challenge any cap or ban on ground rents.
When will the new Act come into force?
The government impact assessment suggested the changes brought in by the Act wouldn’t come into effect until 2025 or 2026, and the while the legislation introduces the key reforms, they cannot take effect until the incoming government introduces further secondary legislation setting the rates used to calculate lease extension and freehold purchase prices.
1954 Act reform
In the realms of commercial real estate, long-heralded reforms seem to be no closer. Unlike the residential reforms mentioned above, no such priority was given by the current government to what some would say is much needed reform to the troublesome Landlord and Tenant (Covenants) Act 1995, or to making the Landlord and Tenant Act 1954 fit for today’s real estate landscape. Another Law Commission review of the 1954 Act has been postponed again because of the election, and it is too early to speculate on whether the Commission might recommend to the new government wholesale reform of the security of tenure regime or (more likely), improvements to the existing processes and procedures.
Effects on the future of leasehold
Throughout its passage through parliament this legislation has always been contentious, with some arguing it doesn’t go far enough and should be extended to banning leasehold flats as well as houses, and others saying it goes too far.
Many freeholders will be relieved to see the proposed ban on ground rents halted, which may assuage those concerns for the time being, and perhaps buy them time to prepare political or legal challenges to the proposal before it resurfaces in the future.
While the Leasehold and Freehold Reform Act was passed in something of a rush, leasehold reform has been under consideration since 2017 and the widening of access to lease extensions and leasehold enfranchisement will be widely welcomed. There is very clear frustration today amongst campaigners who hoped that the Act and the stalled Renters Reform legislation would go much further than has been achieved, to rebalance power away from residential landlords.
However, the Act seems unlikely to resolve the debate over the future of leasehold once and for all, and we expect the incoming government will have to continue to grapple with these issues. It remains to be seen whether the next government will resurrect the Renters (Reform) Bill, or a cap or ban on ground rents.
As and when they do, Hogan Lovells’ Real Estate and Public Law and Policy teams are on hand and uniquely placed to engage with the incoming government on all the detail of those proposals, so do get in touch if we can help you navigate the detail of these proposals.
Authored by Tim Reid.
