Leasehold Reform update

In January last year, the government announced plans to make some of the biggest reforms to residential property law in 30 years. Whilst the changes proposed will primarily impact residential freeholders and leaseholders, they also have significant implications for commercial property investors who hold properties that include residential elements.

The first step in reforming legislation is now well underway with the Leasehold Reform (Ground Rent) Bill having passed through the House of Lords and into the House of Commons where it is at its final stages before it becomes Law, which is likely to be later this year. The primary legislation in this Bill is to ban landlords under most types of new residential leases from demanding or receiving any monetary payment in the form of ground rent from leaseholders. The only payment a landlord will be allowed to demand or to receive is a peppercorn.

The more ambitious second stage of Leasehold Reform legislation will comprise a comprehensive re-write of the existing law of enfranchisement with the primary aim of making it easier and cheaper for leaseholders to extend their lease or acquire their freehold.

The legislation will cover a much wider range of issues than the first Bill and include:

1. Increasing the qualification threshold for mixed use buildings from a maximum of 25% commercial use to 50% and requiring landlords to take leasebacks on non-participating flats
2. Abolishing the “marriage value” element (where applicable) from the calculation of the premium a leaseholder must pay
3. Capping the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations af market value

On 11 January the DLUHC published a consultation on the first of the three points, which is likely to be of greatest concern to commercial property investors. Currently residential leaseholders within a building where more than 25% of floor area is in non-residential use do not qualify to collectively enfranchise (compulsorily purchase the freehold). Increasing this threshold to 50% will extend enfranchisement rights to residential leaseholders where up to 50% of the floor area of building is in commercial use. This creates a risk to a greater number of commercial investors of having freeholds taken from them.

The requirement to take leasebacks on non-participating flats means that a freeholder would not only be left with a 999 year leasehold interest in the commercial element of the building but potentially multiple over-riding leasehold interests in up to 50% of the flats, whose owners chose not to participate in acquiring the freehold. They would lose all the benefits of freehold ownership but inherit the administrative burden of being an intermediary residential landlord.

Parties who might be impacted by the unintended consequences of these proposals can respond to the consultation using the link below, which will be open until 21 February 2022.

Find out more here.