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The Leasehold & Freehold Reform Bill has reached the committee stage after its first and second readings, with sittings diarised through to 1st February. It will then make its way through the House of Lords, before coming back for amendments to be considered, and ultimately Royal Assent.
The government’s consultation around capping ground rent that most leaseholders currently pay closed on 17th January and the feedback is being analysed.
So what is proposed?
Leasehold & Freehold Reform Bill
Numerous changes to the existing rules around flat and house leaseholders’ ability to extend their leases and acquire the freehold are proposed, along with changes to the service charge and buildings insurance regime including:
Currently they must wait 2 years or go through the rigmarole of arranging for their seller to commence the relevant claim and assign it to them with the additional costs and associated risks that currently exist.
This will increase the number of buildings to which these rights will apply.
This will enable them to avoid being priced out of making such claims where the landlord fails to exercise its discretion to take a lease back (as is the decision under the current rules), which can leave leaseholders having to decide whether they have deep enough pockets to afford certain reversions, such as commercial units let on a rack rent basis.
While this will continue to be subject to landlord’s redevelopment break rights (thus preserving the ability for buildings to be replaced as they become uneconomic to repair), this will put more emphasis on improving the terms of the lease during the lease extension process as landlords and management companies will need to regulate multi-occupancy building for a much longer period than originally anticipated.
This may prove popular if this will lower the premium or improve the speed of the process.
The requirement to pay marriage value (applicable where the lease term has dropped below 80 years remaining) is to be scrapped.
Onerous ground rents are to be ignored for the purpose of the calculation; it would no longer take into consideration a ground rent in excess of 0.1% of freehold value.
The government will prescribe the rates used to calculate the premium, meaning the deferment and capitalization rates. The premium being reduced, and how much it will be reduced by, will depend on where the rates are set.
This will simplify the valuation process and potentially reduce the premium payable. Intermediate leaseholders are to receive a new right to commute the onward rent they must pay their landlord in turn to reflect their loss of ground rent income. In a collective claim the participants can opt not to acquire any intermediate lease relating to a non-participant’s flat, potentially reducing the premium they must pay.
This will benefit leaseholders as it is a no costs forum, meaning that in most cases each party will pay their own litigation costs.
Capping Ground Rent
The consultation considers a number of options including:
Introducing a cap which is more restrictive than the valuation assumption under the enfranchisement rules (to be amended as above under the Reform Bill) would have a downward effect on the premium payable by a leaseholder to extend their lease or acquire their freehold.
Mortgage providers currently have requirements around the level of ground rent they will accept and so if a cap is introduced within the most conservative range accepted by mortgage providers, this will have a beneficial effect from the point of view of leaseholders.
Conclusion
It remains to be seen whether landlords will challenge any change the government proposes to make to cap ground rents or under the Reform Bill.
Leaseholders and landlords alike will no doubt take a keen interest on the passage of the Reform Bill through the Houses of Parliament and the outcome of the consultation around capping ground rents.
Mark Vinall, Partner, Ashley Wilson