Leasehold Reform Bill Rushed Through Parliament Before 2024 Election: Impact for Developers and Investors

The House of Lords recently voted through the Leasehold and Freehold Reform Bill in a rush to approve key policies before the dissolution of Parliament, which took place on 30 May. The bill received Royal Assent on 24 May, just before the upcoming general election set to take place on 4 July (the act).

The overarching aim of the act is to make it easier and less expensive for leaseholders to extend their lease or to buy the freehold from which their lease was granted. Although the act has not been published and is not yet in force, the Department for Levelling Up, Housing and Communities announced that the following measures have been included:

• Standard lease extension term is increased to 990 years for houses and flats (increasing from 50 years and 90 years, respectively)
• Transparency of service charges to improve by requiring freeholders or managing agents (as applicable) to issue bills in a standardised format to make service charges easier to scrutinise and challenge
• Granting homeowners on private and mixed-tenure estates comprehensive rights of redress, so they have more information about the charges they pay and can challenge the reasonableness of such charges
• Leaseholders can appoint a managing agent of their choice to make it easier to take over the management of their building
• The freeholder’s costs will no longer be paid by leaseholders when exercising their enfranchisement rights to make a claim
• Access to redress schemes will be extended for leaseholders allowing them to challenge poor practice by freeholders. Freeholders, who manage their building directly, will be required to belong to a redress scheme, in addition to managing agents who are already required to belong to a scheme
• Setting a maximum time and fee for home buying and selling information for leasehold properties
• Ban on the sale of new leasehold houses, so that every new house in England and Wales will be freehold from the outset (other than in exceptional circumstances)
• Leaseholders can buy their freehold or take over the management of the building if up to 50% of its floor space is commercial (increasing the commercial limit from 25%)
• Requirement for a new leaseholder to have owned their house or flat for two years before they can extend their lease or buy their freehold has been removed

However, the act is not what was expected by many in the sector with the proposal to abolish or at least cap ground rent at £250 for existing leaseholders not having been included. Ground rent has been a key area of investment – for example via sale and leaseback agreements – for more conservative and long income investors, such as insurance companies and pension funds. 

As a result, the proposed cap of £250 per year would have significantly lowered the returns received by ground rent investors under these and similar arrangements. Further, according to the “Modern leasehold: restricting ground rent for existing leases” consultation, there were also no plans to compensate freeholders for any lost revenue. Therefore, landlords and investors previously concerned that the cap would harm the value of their investments may breathe a sigh of relief at the cap’s exclusion from the act. 

Another notable exclusion appears to be the policy to prevent forfeiture of long residential leases, which currently permits a freeholder to repossess a flat if a debt of £350 arises. 

The changes that did make it into the act will take time to come into effect, particularly the ban on the sale of new leasehold houses, which is likely to adversely impact the interests of developers (in terms of the type of financing available to them) and those who seek to invest in stable long-term income backed by residential assets.

With investors and developers playing a key role to meet the ever-increasing need for housing in the U.K., an important consideration for the next government will be whether investing (directly or indirectly) in property in the U.K. is still an attractive and economically viable option given the impact of the act. 

Brown Rudnick’s team of expert finance lawyers advise investors and developers across the entire spectrum of real estate finance including sale and leaseback arrangements, income strips as well as conventional debt structures.