What are the key takeaways from the Act?

• Increases the standard lease extension for both houses and flats to 990 years.
• Makes it cheaper for leaseholders to extend their lease or exercise their collective enfranchisement rights.
• Bans the sale of new leasehold houses (with certain exemptions).
• Removes the two year ownership requirement before the right to extend or buy the freehold can be exercised.
• Increases the pool of leaseholders who can exercise enfranchisement or Right to Manage rights by changing the percentage of commercial floor space from 25% to 50%.
• Increases the transparency of service charges.

Notable things which did not make the Act

No amendments were made to restrict ground rent before the Act received Royal Assent. There had been Law Commission consultations on potentially capping ground rents at £250 per annum, or reduce them to zero, and the Act is seen as underwhelming by many.

Another notable omission from the bill is the prevention of forfeiture, a draconian measure which can possibly be exercised by freeholders to bring the lease to an end.

There is currently no commencement date for the Act and it will be for whoever forms the next Government to decide on when it will be implemented. There may also be further reform.

If you require advice relating to the above, or any property matter, please contact our expert Property team who will be happy to assist.

Article written by Residential Conveyancing Solicitor Ben James.

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The complexities of the government’s leasehold reform proposals affecting millions of homeowners came under the spotlight at a seminar organised by Coventry and Warwickshire’s law firm Brindley Twist Tafft & James and property experts ehB Residential Surveys.

Forty invited guests – including estate agents, surveyors, private finance advisors and conveyancing lawyers were among those who attended the event at the Warwick Arms Hotel on Tuesday.

The event follows Michael Gove’s plans to shake up England and Wales’s ‘feudal’ leasehold system were announced in the King’s speech in November.

Gove said the proposed leasehold Reform Act would overhaul the system and prevent developers from selling new houses under leasehold, ensuring a fairer deal for leaseholders.

It would also make it easier and cheaper for leaseholders to extend their lease agreement or buy their freehold, giving them more control of the land on which their property is built.

Alex Khan, Partner and Property Solicitor at BTTJ said the problems within the current system are compounded by issues such as multiple ground rents – the charge for renting the land from the freeholder – diminishing lease terms, excessive insurance commissions and overcharging of service charges.

Under the current legislation the standard lease extension term is currently 90 years. The proposed new legislation will increase this to 990 years – saving leaseholders the headache of a long, complicated and expensive process of extending leases which can cost thousands of pounds.

The reforms also aim to ensure service charges and ground rents are transparent and reasonable.

The Conservatives have also promised greater transparency of the system, the banning of excessive insurance commissions and an end to the requirement for a new leaseholder to have owned their property for two years before being able to extend the lease or buy the freehold, resulting in a rising premium.

They have pledged to remove the ‘marriage value’ cap meaning leaseholders with less than 80 years left on the lease will no longer have to share the hypothetical profit of the property with the freeholder, meaning they could potentially benefit by thousands of pounds.

Alex Khan said the government is also proposing to allow leaseholders of mixed use properties with up to 50 per cent of non-residential floor space to buy the freehold and manage the building, a move which Mr Khan said would allow residential tenants who live above a business, but have no experience in commercial property, to manage their entire building.

“Often referred to as ‘fleecehold’, leasehold is a diminishing asset.  It was first brought about by barons who would finance their crusades abroad by leasing their land to tenants for a peppercorn rent on the basis they knew the land would always be theirs. The system itself actually does work but in the last 20 years it has been abused, so what used to be an £8 ground rent is now £300, £500, going all the way up to £10,000 for the lifespan of a lease, and it prevents people from selling a property so the system has spiralled into an abyss.”

Jonathan Selby explored a number of options which may be implemented by the government, including abolishing the marriage value or introducing a ground rent cap either at 0.1 per cent of the property value, or at £250.  Other option included re-setting the ground rent to the initial ground rent set out in the lease or freeze it at the current value.

He said: “Mr Gove says he will have all of this in place before the general election scheduled for later this year, but realistically I think we could still be talking about this in four or five years’ time. The legislation that may go through may be so watered down that it barely affects anyone at all.”

Conversely labour says it would scrap the leasehold system altogether within if it wins the general election.

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Below is a note of key matters tenants should also consider, ideally before terms are agreed with the landlord and certainly before the lease is signed. The list is not exhaustive.

 Planning Use

The lease may authorise that the use of the Property, but this does not mean that the Property has the correct planning use. Tenants are advised to investigate whether the property has the planning use that they need it to have to operate their business. If it does not, the tenant will need to agree with the landlord that it can apply for planning to change the use and an agreement for lease should be entered into the agreement for lease would be conditional on planning so that if planning is not granted the tenant is not compelled to enter into the lease. Tenants are advised not to enter into leases until the planning use is clear.  Having an incorrect planning use can lead to enforcement action being taken by the local authority thus preventing a tenant’s desired use of a Property yet a liability to pay rent.

End of the Term

The most common way a lease will end is on the contractual expiry date whereby, the tenant will vacate the property. However, the Landlord and Tenant Act 1954 is legislation which gives a tenant, occupying a property for business purposes, a statutory right to renew their lease on similar terms to their existing lease. The landlord can request that the lease is contracted out of the Landlord and Tenant Act 1954, so it is important that you consider your rights as a tenant prior to entering into a lease. If, for example, you have plans for growth expansion and future sale of your business a protected tenancy is the more attractive option to a proposed buyer.

Stamp Duty Land Tax and Registration:

A grant of a lease may trigger the payment of SDLT and/or as registration. This will depend on the length of the lease, the amount of the rent or premium.

The amount of SDLT can increase if VAT is payable on the rent. HMRC will calculate SDLT on the amount of rent including VAT. This may be additional expense which a tenant has not factored in.

Where a lease is for a term of more than 7 years it will be compulsorily registerable at the land registry. The obligation to register also applies to reversionary leases even where the term is less than 7 years, where the term start date is more than three months after the date of the grant of the lease.

Rent Review

Where there is an open market rent review clause in the Property, rent will be reviewed on the various assumptions and disregards which should be reviewed by your surveyor.  Improvement works that you carry out should be disregarded on rent review as the landlord should not benefit from an increased rent as a result of the Tenant making improvements to the Property. Furthermore, any alterations should also be disregarded. The assumptions and disregards should be drafted on the basis that they are fair to the Property they refer to as at the date of grant.

Repair

Leases are often drafted on a “full repairing basis”. This means the landlord can ask you to return the Property in a better state than it was in at the time of the grant of the lease. You and your surveyor should inspect the Property to ascertain the state and condition of the Property and where the Property is in an inadequate state of repair, a schedule of condition recording the state of repair should be included in the lease. This will limit your repairing obligation and thus you will not have to return the property in any better state than evidenced by the schedule of condition. Landlord’s will try and resist this point but where required it should not be conceded.

EPC Rating:

Tenants ought to ensure that the Property has a minimum energy efficiency rating of E. As of 1 April 2023 all commercial premises (unless exempt) need to have a minimum E rating in order for the landlord to be able to lawfully let the property. It is envisaged that the minimum standard by 2023 will be at level C and level B by 2030. Tenants should therefore ensure that there are clauses in the lease stating that improvement works in relation to the EPC ratings are carried out at the Landlord’s cost and not the Tenants.

Sharing occupation of a leased property

A commercial lease should clearly set out a tenant’s ability (if any) to sell its lease to someone else, sublet or share occupation of the property with a third party. Unless this is a key part of your business model you may not give it much thought when signing up to the lease however, circumstances can change over time and it is advisable to clearly understand your options to assign, sublet or share occupation of the property.

Break clauses

Break clauses allow you to terminate a lease at a certain time during the term provided you have given notice as required by the Landlord. Break clauses often come with tight restrictions so you must ensure that at the Break date you are able to comply with those restrictions. For example, the requirement to deliver with vacant possession is extremely difficult to comply with. There is extensive commentary and case law surrounding this.  It is essential that a break clause contains a requirement for the landlord to refund any overpayment of rent from the Break Date to the next Rent payment date to ensure you are not out of pocket.

End of the Term

The most common way a lease will end is on the contractual expiry date whereby, the tenant will vacate the property. However, the Landlord and Tenant Act 1954 is legislation which gives a tenant, occupying a property for business purposes, a statutory right to renew their lease on similar terms to their existing lease. The landlord can request that the lease is contracted out of the Landlord and Tenant Act 1954, so it is important that you consider your rights as a tenant prior to entering into a lease.

Our advice to any potential tenant is to give a great deal of consideration to terms of the lease and matters highlighted above before entering into the lease. A lease is a liability which will run for a number of years so it is important that the terms are acceptable and correct for all parties. Please contact our experienced Commercial Property team.

Article written by Commercial Property Solicitor Bejul Lekhani-Lever

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Alex Khan, Partner & Property Solicitor says: “The government has spoken about Leasehold reform for a number of years and I hope these changes are the start of things to come. These changes are only for new leases and property owners of flats are still at the mercy of the current legislation”.  

Information published on the gov.uk website is as follows:

The Leasehold Reform (Ground Rent) Act 2022 comes into force on 30 June 2022, except for retirement properties where it will not come into force before 1 April 2023.

It puts an end to ground rents for new, qualifying long residential leasehold properties in England and Wales. This is part of the most significant changes to property law in a generation.

After the Act comes into force, ground rent in most new leases cannot legally be for anything more than “one peppercorn per year”. This “peppercorn rent” means that no money can be legally charged or paid as ground rent on leases regulated by this Act.

The Act bans freeholders from charging administration fees for collecting a peppercorn rent.

Fines of up to £30,000 may be levied where ground rent is charged in contravention of the Act.

There are very few exceptions from the Act, which are:

-Applicable community-led housing

-Certain financial products

-Business leases which are defined by the Act as leases of commercial premises which include a dwelling, use of which substantially contributes to the business purposes

Statutory lease extensions for both houses and flats remain unchanged and are therefore exempt from the provisions of the Bill.

For existing leaseholders entering into voluntary lease extensions after commencement, the extended portion of their lease will be reduced to a peppercorn.

Alex states: “It is important to get for Tenants to obtain the right advice from a solicitor and surveyor who have experience in the area of leasehold enfranchisement”

Contact our highly experienced Conveyancing team on 02476 531532 or email enquires@bttj.com for more information

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To extend the term informally, the leaseholder can approach the freeholder and negotiate the length of the term, along with any other alterations to the Lease that may be wanted such as, for example, amending the ground rent that is paid.  The benefit of this method is that, depending on the freeholder, it may be possible to negotiate an exceptionally long new term with, in some circumstances, a nominal premium being paid.  The drawback, though, is that a freeholder does not need to agree to anything that the leaseholder wants which can result in a stalemate. 

To extend the term formally, a “Section 42” Notice must be served on the freeholder by the leaseholder.  This Section is found within the Leasehold Reform, Housing and Urban Development Act 1993 which Act contains the process and time limits for a Lease extension.  With this method, the term will be extended by ninety years plus the remaining term and ground rent will be reduced to a peppercorn meaning, in practice, that no ground is payable.  A valuation report prepared by a suitably qualified surveyor would need to be obtained by the leaseholder to establish what premium should be offered in the Notice.  Consideration must also be given to the fact that the leaseholder will be responsible for the freeholder’s costs as well.  However, under the formal method, the freeholder cannot deny the leaseholder a Lease extension.

The Government has consulted recently on the issue of ground rents for new build properties.  The draft legislation will seek to restrict ground rents on newly created long leases of houses and flats to annual of one peppercorn.  Whether this will be extended to existing properties remains to be seen and whether there is political appetite to make further changes may be ambitious. 

Always proceed with caution but it will always be more expensive if you wait and even if there are changes in legislation the Freeholders will have to be compensated for loss of the value to the Freehold.

At Brindley Twist Tafft & James we have a wealth of experience in dealing with both methods.  If you are therefore considering extending the term of your Lease, please feel free to contact our experienced Conveyancing team and we will be able to guide you through the process. 

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