Leasehold Reform - What Changes Will They Bring for Lease Extensions?

The much anticipated King's Speech on 07 November 2023 proposed reform through the Leasehold and Freehold Bill. Under this new Bill, it is proposed that leasehold ownership for new houses will be banned in England and Wales. This will not however apply to flats. In addition to this proposal, the new Bill will vastly increase the statutory lease extension period to a whopping 990 years.

There are at present various eligibility requirements and standard terms when considering the issue of lease extensions for a leasehold flat. The relevant legislation which applies to said flat extensions is the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993).

Under the Act currently, the standard term of new lease for a statutory lease extension for a flat is 90 years, in addition to any unexpired term of the existing lease. Lease extensions sought via an informal route, i.e., not formally sought under the LRHUDA, provide scope for a longer term should the freeholder be agreeable to the same, but they are not obliged to agree a longer term.

In addition to the statutory lease extension term being increased from 90 to 990 years, here are some of the other elements that will be affected or completely removed, if the Bill is approved in its current form: -

1. The requirement for a leaseholder to have been the registered proprietor of the property at the Land Registry for two years - the proposal is to removal this requirement completely;

2. Buildings where more than 25% of the floorspace is occupied for non-residential purposes are currently not eligible for collective enfranchisement or right to manage claims - the proposal is to increase the limit to 50% in mixed use buildings, in turn increasing the number of leaseholders who will be able to own and manage their own buildings;

3. At present, many new homes are sold with leasehold rather than freehold title - the Bill proposes to ban the creation of new leasehold houses so that all new houses will be sold with freehold title, except in certain circumstances.

4. Currently, ground rents are uncapped, meaning many leaseholders are left with steep doubling clauses or rent review clauses based on RPI. The Leasehold Reform (Ground Rent Act) 2022 has restricted ground rents in most new leases to a peppercorn but it doesn't affect existing leases - there is a consultation open for seeking views on capping ground rents for existing residential leases, which will close on 21 December 2023.

It is clear that these proposals are progressive and may mean that owners of leasehold properties will be able to benefit from a 990 year lease extension and significantly reduced ground rents. This will remove the foreseeable hassle and cost of extending short leases, which can be very expensive for leaseholders who are at present not only liable for the freeholder's legal costs, but also the cost of a premium in the context of flats.

Moreover, by banning the creation of new leasehold houses, homeowners will own their properties outright from the start. This of course does not rule out the potential for rent charges to be charged to freeholders by way of service charges, but it does eliminate the need and expensive of freehold acquisition claims.