Residential leasehold reform update

In November 2023, we considered the proposed ban on the creation and sale of new houses by way of lease, which was announced in the historic first King’s Speech.

Since our note was published, the Leasehold and Freehold Reform Bill has been introduced and considered in the House of Commons. It has since progressed up to the House of Lords, where it was examined in detail on 1 May 2024. The report stage was on 1 June 2024 in the House of Lords, although with the calling of the General Election, it is now uncertain when (and whether) it will pass into law.

Details of the current draft Bill

The current draft Bill includes the proposed ban on granting long residential leases of houses or entering any agreement to do so. The ban would take effect on the date on which that section of the Bill comes into force.

Ban on residential leases of houses

The Bill defines a long residential lease of a house as a lease that has the following terms.

  • The lease term is longer than 21 years, or is capable of forming part of a series of leases whose terms would extend beyond 21 years.
  • The demise comprises one house and nothing else (other than “appurtenant property” such as a garage or garden), being either the whole or part of a building that is constructed or adapted for the purposes of a dwelling. The Bill contains a caveat that premises would not be a “house” if a material part of the premises lies above or below another part of the building of which it forms part. In this way, the Bill attempts to distinguish a “house” for which the ban will apply and a “flat” for which the ban would not apply and also seeks to deal with the concept of “overhang” and “flying freehold”.
  • The lease is residential, meaning that the lease does not prohibit the house from being occupied as a separate dwelling.

Permitted leases

There are exceptions for “permitted leases” of houses. These are split into two categories: those that require certification from the courts and those that can be self-certified.

1.
Certified permitted leases

There is a process in the Bill for the First-Tier Tribunal to issue certificates (”permitted lease certificates”) to confirm that a lease will be a permitted lease.

The Bill also contains specific restrictions for permitted leases, including requirements for the details of the lease to be included in marketing information for the sale of the lease – the aim of which is to ensure that marketing of such properties makes it explicit to buyers that they are acquiring a leasehold house.

The grantor of the lease (often the developer) will also need to issue a warning notice (in prescribed form) to the proposed tenant by the developer at least 7 days before the agreement for lease or lease grant, as appropriate confirming the grounds upon which the lease is a ‘permitted lease’. The prospective tenant must provide a notice of receipt (again, in prescribed form) to the grantor and an endorsement to record the process must be included on the face of the lease. Practitioners will find this process similar to the contracting out process under the LTA 1954 and will be familiar with the onerous nature of such mechanics. For practitioners, it will be necessary to request and retain copies of the warning notice and evidence that the relevant detail appeared in marketing information.

These certified permitted leases are the following.

  • Leases granted out of superior leasehold estates, provided that the superior leasehold estate was granted before (or granted pursuant to an agreement made before) 22 December 2017.
  • Community housing leases granted by a community land trust or as part of a building controlled or managed by a co-operative society.
  • Retirement housing leases granted: (i) to tenants who are at least 55 years old at the date of the lease (and cannot be assigned or underlet to anyone who is not also at least 55 years old); and (ii) of part of a retirement development or scheme in which all of the houses also meet the conditions in (i).
  • Leases of specific National Trust property.
2.
Self- certified permitted leases

The permitted leases that will not require court certification are the following.

  • Leases granted in accordance with an agreement for lease dated before this section of the Bill comes into force.
  • Shared ownership leases that meet certain conditions around the tenant’s ability to increase the tenant’s share, including a right for the tenant to acquire the freehold of the house (if it is owned by the landlord) for no consideration when the tenant’s share reaches 100%.
  • A home finance plan lease granted pursuant to: (i) a regulated home reversion plan; or (ii) a rent to buy arrangement.
  • An extended lease, i.e. a lease that has arisen through the extension or surrender and regrant of an existing lease that pre dates the operation of this section of the Bill.
  • An agricultural lease, where the house is part of an agricultural holding or a farm business tenancy.

 

New prescribed clauses for all leases

For practitioners, it is important to note that for all long leases granted after this section of the Bill comes into force, there will be new prescribed statements that must be included in leases. These will need to state whether or not the lease is a long residential lease of a house and whether the lease is a permitted lease. We expect that the Land Registry will issue rules about these prescribed clauses in due course. Failure to include the prescribed clauses will not necessarily prevent registration of a lease, but the Land Registrar will be required to apply a title restriction preventing dispositions of the leasehold title without a variation to include the prescribed clauses. This effectively restricts onward sale without compliance.

Consequences of breach

If any leases are granted in breach of the prohibition, then:

  • the tenant (and on some occasions the charge holder) has the right to acquire for no consideration the freehold estate in the land and the power to compel the seller to transfer the freehold to them; and
  • the landlord may be subject to a financial penalty of no less than £500 and not more than £30,000 for a breach.

The tenant’s right to redress if mis-sold a leasehold house is to be given effect by regulations to be made by the Secretary of State (i.e. in secondary legislation). The Select Committee has confirmed that, given the breadth of this power, the regulations will be subject to the affirmative procedure (meaning that they will need to be actively approved by both Houses of Parliament).1

Anti-avoidance

The Bill contains provisions that would prevent circumvention of the prohibition by constructing a house on “land leased for other purposes and then selling the lease.” In such cases the initial lease granted would not be a long residential lease but would subsequently become one.

The Bill also prevents any contractual fetter of the prospective tenant’s right to redress, for example, by seeking to apply a penalty to the tenant in the event that they exercise their statutory right of acquisition if mis-sold a leasehold house.

Reception of the Bill so far

Although the abolition of leasehold housing was a key aspect of the Bill at the time it was announced in the King’s Speech, the initial draft of the Bill that was considered in the House of Commons did not include the detailed drafting on this point. The absence of detailed drafting until late February 2024 has limited the debate of the terms of the abolition so far.

Generally, the Bill has received broad support, but with criticism focused on the Bill not going far enough to protect leaseholders. In particular, Labour have been vocal in raising concerns that the Bill would not ban long residential leases for flats: “70% of all leasehold properties are flats and there are over 600,000 more owner-occupied leasehold flats than houses in England…those owners will still be wondering just when the government will fulfil their pledge to them” (Angela Raynor, 11 December 2023). This has been echoed by interest groups such as the Homeowners Alliance. The Government has indicated that its focus is on finding alternative workable solutions to leasehold flats (such as commonhold).2

The Shadow Housing Minister Matthew Pennycook has also raised concerns about the number of permitted leases, in particular, the carve out for leases granted out of superior leases dated before December 2017: “we literally have no idea how many undeveloped plots… might be subject to such superior leases” (27 February 2024).3

The British Property Federation (7 November 2023) has been supportive of the “sensible” abolition of leasehold houses, but it has been more critical of other aspects of the Bill and the failure to achieve “comprehensive reform”.

1 House of Lords Delegated Powers and Regulatory Reform Committee 19th Report of Session 2023-24

2 HC Hansard, 27 February 2024, col 193

3 HC Hansard, 27 February 2024, cols 204–5