A Summary of the Second Reading of The Leasehold and Freehold Reform Bill

The Leasehold and Freehold Reform Bill’s second reading took place at the House of Lords on 27th March 2024 and the first Committee Stage sitting took place on 22nd April 2024. The Bill aims to provide greater fairness, security, transparency and competition to the leasehold housing market.

For a more in-depth outline of what the Bill aims to achieve, please see our article on “Leasehold and Freehold Reform”.

What happened at the second reading?

The debate focused on forfeiture, commonhold, the regulation of property agents, marriage value, ground rent and service charges as areas of serious interest.

The opposition concluded their debate highlighting the key phrases mentioned in their arguments: “missing detail”, “insufficient”, “limited”, “lacking ambition”, “significant shortcoming”, “not properly thought through”, and “glaring omission”. However, some notable arguments were made to say it goes too far in places with the potential of having a significant negative impact on investors, for example.

Baroness Scott of Bybrook addressed each of the points as parliamentary under the Secretary of State at the Department for Levelling Up, Housing and Communities, on behalf of the government.

Below are some of the arguments, proposed amendments, and how she responded:

Ground Rent

We have seen some significant reform in ground rent in the Leasehold Reform (Ground Rent) Act 2022, reducing the ground rent on new leases to a ‘peppercorn’, i.e. nominal on all leasehold properties. Some seemed to be in favour of this, however it was also argued that this would financially impact investors negatively, as well as people who rely on ground rent as their income.

Baroness Scott stated that the government are aware of this negative impact and are carefully considering this as they study the consultation.

 As a result of this, at the Committee stage sitting on 22nd April, it was agreed that there is now potential for ground rent to be capped at £250, rather than it being reduced to a ‘peppercorn’. This is what the bill initially set out to do, arguably further watering it down. The reason for this seems to be to protect the freeholders from the loss they would face should the ground rent be reduced to zero. It was stated that the government would have to pay a reported £27.3bn to freeholders to compensate them for their loss from the ban on ground rent. The aim is for the £250 cap to be phased out over time, however, there is uncertainty as to how long this will be.

Referring to ground rent, the Baroness also addressed the Renters’ Reform Bill. She stated that they are aware that leaseholders with ground rents of more than £250 per year can be legally regarded as assured tenants. They aim to address this by removing   all leaseholders with a lease longer than seven years from the assured tenancy system in the Renters’ Reform Bill.

Marriage Value and Enfranchisement

It was raised that in abolishing marriage value, a great transfer of wealth will be going to investors rather than owner-occupiers, especially benefiting non-UK resident leaseholders and impacting UK pension funds. It was brought to light that a considerable number of leasehold properties are owned by investors, rather than occupiers. A grandfather clause was suggested to protect investors and maintain investor confidence in the property market.

Baroness Scott argues that “retaining marriage value would counter to their aim of making it cheaper and easier for leaseholders to extend their lease or acquire their freehold. Removing marriage value and hope value will deliver a level playing field and wide access for leaseholders who may otherwise find it prohibitively expensive to extend their lease or purchase their freehold. The wider reforms to enfranchisement value will ensure that sufficient compensation is paid to landlords to reflect their legitimate property interests.”

She reiterated that there is still a plan to launch a marriage value calculator once the bill has passed, as this will help leaseholders understand how much it will cost to extend their lease or acquire their freehold up front, allowing for further transparency.

Forfeiture

It was argued that forfeiture is a “gangster-like” power, used to threaten leaseholders and that there should be a provision in place to prevent landlords from threatening this. Although there are already protections in place in the Commonhold and Leasehold Reform Act 2002, many argued for the abolishment of forfeiture entirely, allowing further protection for leaseholders.

Baroness Scott advised that the government recognise the severity of this as there is huge inequity at stake. They will consider the matter further and report back.

Banning new leasehold flats, as well as houses and Commonhold

A common opinion was that the Bill did not go far enough by only banning new leasehold houses. Many argued that this should include flats, as most flats are leasehold rather than freehold. There is also a push to replace leasehold with commonhold, but a lack of clarification on how the government plans to implement the commonhold system.

Lord Baroness expressed that most houses have always been provided as freehold and there are few justifications for building new leasehold houses; that is why they are being banned. However, since flats share an infrastructure, the management of this needs to be facilitated which has historically been done by a lease, but the government recognises the issues with the leasehold system. They also recognise the lack of commonhold measures to effectively replace leasehold flats, but maintain a commitment to commonhold reform and sees it as a long-term replacement for leasehold. The commonhold structure failed to launch once already and to avoid this happening again, the government want to ensure that the introduction of commonhold is considered carefully.

Right to Manage and Regulation of Property Agents

The Bill introduces the Right to Manage scheme which requires managing agents to be more transparent with leaseholders about service charges and gives the leaseholder the right to decide who manages their building, a power which currently resides with the Landlord.

In theory, it was stated that this gives the leaseholder more power and protection from unclear and unreasonable service charge costs however in practice, it could be messy to let occupiers manage their building and this could lead to choosing to use managing agents anyway. Furthermore, if they choose to keep managing agents, the agents still hold some power by being able to decide what information to give out to the leaseholders so it is not guaranteed that leaseholders will have more transparency. The Lords argued that the Right to Manage requires better construction so it was suggested that building management should still be subcontracted but regulated.

Many of the Lords seemed to support the idea of a regulator for all property agents to ensure less poor practice and better transparency. Especially since the introduction of the Building Safety Act, management companies are handling large sums of leaseholder and public money for remedial works therefore must be regulated. In addition, the regulation would help reduce poor practices and unreasonable and unclear costs to the leaseholder.

Baroness Scott reiterated that building management can be difficult therefore this Bill gives leaseholders the choice to decide how their building is managed. The Bill introduces measures to empower homeowners and make estate management companies more accountable to them for how their money is spent, including the ability to apply to the appropriate tribunal to appoint a substitute manager.

Regarding the regulation of managing agents, Baroness Scott states that the current Parliament do not have enough time to legislate a new regulator for property agents, and the Government believe that any regulation can, and should, be done in an appropriate and proportionate way that controls the cost to business. She states that the powers the Bill gives to leaseholders to scrutinise costs, challenge service, and appoint or replace managing agents, alongside the fact that managing agents must already belong to a redress scheme, seeks to make managing agents more accountable.

What comes next?

The Bill is currently at the Committee Stage at the House of Lords and had its first sitting on 22 April 2024. At this stage, the committee will decide whether each clause of the bill should remain, and they will consider any amendments to make to the bill. These could range from changes to clauses to adding new material.

At the first sitting, the following matters were considered:

• Welsh Legislative Consent was sought
• Clauses 1 to 6 were agreed.
• Debate on whether Clause 7 should stand as part of the Bill. This is the clause referring to permitted leases i.e. leases exempt from the ban.
• Shared ownership schemes and staircasing caps preventing 100% ownership.
• Providing leaseholders in flats with a share of the freehold
• Banning the creation of new leasehold flats.
• Ground rent being capped at £250.00 rather than reduced to a peppercorn

There will be 3 further days of the Committee Stage and they have been scheduled for Wednesday 24 April, Monday 29 April and Wednesday 1 May.

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