What changes are proposed in the leasehold & freehold reform bill?

The Leasehold and Freehold Reform Bill 2023-24 (LFRB) was introduced to Parliament on 27^th November 2023. One area the LFRB looks to substantially alter is the law surrounding leasehold enfranchisement (the right of a leaseholder of a house to acquire the freehold or the rights of tenants in a block of flats to come together to buy the freehold of the entire building in ‘collective enfranchisement’) and lease extensions for both houses and flats as it looks to make the laws more ‘tenant friendly’.

Alongside being familiar with the current proposed contents of the LFRB, landlord’s should monitor the LFRB’s progress through the Parliamentary process. The government stated that further amendments would follow, with the intention to further increase the protection and opportunities available to tenants. One such proposal is the ban of new leasehold houses across England and Wales, except in exceptional circumstances  and understand the impact this will have in order to plan ahead accordingly.

But what is the impact of these ‘tenant friendly’ laws on landlord’s? The following are some of the key changes that all Landlord’s should be aware of:

Removal of the two-year ownership requirement

Under the LFRB a tenant no longer needs to have owned the lease for a minimum of two years before exercising the right of enfranchisement or lease extension, allowing an immediate exercise of these rights as soon as a tenant has entered into a lease with the landlord. Landlords should therefore consider factors such as whether a prospective tenant qualifies for the right of enfranchisement, a realistic premium for a lease extension or price for purchasing the freehold and whether they have any grounds to oppose the tenant’s claim when the leasehold interest is transferred to a new tenant to pre-empt an immediate exercise of the right by the tenant.

Removal of restrictions on repeat claims

The Bill proposes removal of the current restrictions preventing tenants from bringing a fresh claim within 12 months of a failed/withdrawn claim, and tenants of houses bringing more than one claim for lease extension. Tenants therefore would not have to wait for 12 months following a failed/withdrawn claim (by which time the price may have increased) before bringing a fresh claim.

Increased limit for collective enfranchisement

A building that qualifies for collective enfranchisement can now have up to 50% of the internal floor space, excluding common parts, used (or intended to be used) for non-residential purposes (up from the current threshold of 25%). Landlords of mixed use buildings should therefore look to re-evaluate their proprieties to confirm whether or not their property now falls within this extended bracket of qualifying properties.

Houses and Flats have a right to a longer lease on renewal

The LFRB would allow for the cap on existing lease renewals to be increased from 50 years for houses and 90 years for flats to 990 years for both flats and houses.

The right to lease houses at a peppercorn rent and the right to peppercorn rent variation in very long leases

If a qualifying tenant holds a lease of at least 150 years they will have the right to vary the lease, replacing any existing ground rent payable with a peppercorn rent. Such right is exercisable on payment of a premium and can be exercised separately to the exercise of enfranchisement rights.

In conjunction, new long leases of houses will be granted solely in return for a premium meaning long leaseholds for houses will now be for a peppercorn rent following any extension, aligning with the position of long leaseholds for flats.

Please note it is not the landlords responsibility to initiate discussions with the tenant for this variation. If the tenant does not exercise this right then the lease can continue with the ground rent remaining.

Amendments to the valuation methods for premiums in enfranchisement and lease extensions

The valuation methodology is complex and both parties should seek specialist advice from a valuer experienced in the field. The aim of the LFRB seems to be to reduce premiums across the board.

Key changes include the removal of marriage value (the assumption that a property is worth more with a combined freehold and leasehold interest) and hope value (which will have a varying level of impact depending on the location of the property in question). Alongside this, theoretical ground rent used in the valuation calculations will be capped in the calculations at 0.1% of the freehold value.

The premium itself will primarily be based on the market value of the freehold interest (where acquiring the freehold) or a notional lease of 990 years plus the remaining term of the existing lease (where extending the lease).

Until the bill is passed and actual rates are published this general anticipated reduction in premiums cannot be confirmed with complete certainty.

Please note that the contents of this blog is intended as general information only, and does not constitute legal advice. If you are looking for specific legal advice on this subject, please contact one of our team, who would be happy to advise further.