2024 is set to be a pivotal year for the property sector, marked by significant legislative reforms.
In March 2023, the Law Commission initiated a consultation on the Landlord and Tenant Act 1954, aiming to revitalise high streets and create thriving spaces that attract investors. While the reform was initially anticipated in December, it has been postponed to 2024.
Furthermore, in November 2023, The King’s Speech outlined extensive reforms concerning leasehold properties, notably by the prohibition of new leasehold houses as opposed to leasehold houses. The same month, the Leasehold and Freehold Reform Bill was presented to Parliament.
Although further developments are expected, this article will explore these two important reforms.
The Leasehold and Freehold Reform Bill – Is Fairness in the Housing Market to Come?
Data collected from the Official Statistics between 2021 and 2022 revealed that leasehold dwellings constitute 20% of the English housing stock, amounting to an estimated 4.98 million dwellings. Within this total, 3.5 million were flats and the rest were houses.
On 27 November 2023, the Leasehold and Freehold Reform Bill (‘the Bill’) was introduced to Parliament. Ahead of the Bill’s introduction, the Housing Secretary Michael Gove marked the day as a landmark moment for millions of leaseholders as the Bill introduces significant new rights and protections to leaseholders. These new protections and liberalisation of leaseholders are integral part of the government’s Long-Term Plan for Housing.
Extension of Leases
The Bill aims to make it more affordable and easier for people to extent their lease or buy their freehold. Additionally, leasehold transactions are expected to become quicker and more efficient with a set maximum time and fee for buying and selling information.
Under the proposed changes, the standard lease extension term will be increased from 50 years in houses and from 90 years in flats to 990 years for both so leaseholders will enjoy secure ownership without the hurdles and expenses of lease extension. Moreover, the ground rent will be reduced to a nominal peppercorn. Furthermore, the requirement for a new leaseholder to have owned their property for 2 years prior they can extent their lease or buy their freehold will be removed.
Building Managements and Service Charges
Several recommendations pertain to service charges and building management. The proposed reforms aim to provide leaseholders with enhanced transparency regarding their service charges. This objective will be realised by freeholders or managing agents issuing bills in a standardised format that can be easily scrutinised and challenged. Additionally, leaseholders will be able to take over the management of their building and appoint a managing agent of their own.
Currently, there is a presumption that leaseholders are responsible for paying their freeholders’ legal costs. This presumption acts as a deterrent whenever a leaseholder wanted to challenge their service charge. The new rules are designed to make the exercise of leaseholders’ enfranchisement rights cheaper as this scrap presumption will be removed.
Landlord and Tenant Act 1954 – Consistency on the One Hand, Flexibility on the Other
Announcements on modernising the Landlord and Tenant Act 1954 (‘1954 Act’) were initially made in March 2023. The 1954 Act is a central piece of legislation that gives businesses the right to stay in their premises for longer.
It has been almost two decades since the last review of the 1954 Act, and given the transformative effects of online retail, the past and the recent economically turbulent times and the pandemic on businesses, there is a growing imperative for modernisation. Early indications showed that instead of full repeal, the 1954 Act will be reviewed.
Security of Tenure
The critical question surrounding the 1954 Act reform is whether security of tenure should be preserved or eliminated entirely?
In high streets, towns and various commercial hubs, businesses heavily rely on securing the suitable premises to expand as well as satisfy their customers’ needs. Rather than owning a freehold, businesses prefer leasing spaces. Today, for more than fifty-years, the 1954 Act has granted businesses the right to secure a new lease of their premises after their existing lease has run out. This right is called the security of tenure.
In practice today however, many landlords exclude this protection when renting out their premises. Before 2004, to exclude the application of security of tenure, a court order was necessary. Although the current statutory notice procedure is much more simplified, there is still room for enhancement.
Under the current regime, this protection is waived first by the landlord serving a warning notice on the tenant explaining that the tenant’s rights are being waived. Second, the tenant makes a declaration to acknowledge that s/he understands the consequences of exclusion. And finally, the lease includes an endorsement referring to the landlord’s waning notice and the tenant’s acknowledgment and the parties’ agreement that security of tenure has been contracted out.
The existing process, especially when parties are legally represented, is needlessly complex. Any mistakes in the procedure expose the landlord to the potential risk of a future claim for security of tenure. Furthermore, this process poses challenges in common scenarios encountered in today’s transactions such as where a property is sold subject to a contracted-out agreement for lease or the precise location of the property cannot be determined at the time of the agreement. While these challenges can be navigated, they lead to inconsistencies. Consequently, as mentioned by the Law Commission, there is a recommendation to develop a modern legal framework that is widely used rather than subject to opting out.
Flexibility for Turnover Rents and Green Lease Clauses
Turnover rents are commonly found in retail leases. These clauses are tailored for individual tenants based on their business performance. However, these clauses diverge from the 1954 Act’s approach, where rent is agreed between parties by having regard to open market valuation based on a hypothetical transaction between willing parties to protect tenants from paying overblown rents.
Finally, ensuring sure the current legislation aligns with government’s wider priorities such as achieving a ‘net zero’ carbon footprint is a crucial pillar of the reform. Given the growing emphasis on ESG in the property sector, landlords are pressured to incorporate consistent green clauses into leases for achieving net-zero targets and energy efficiency. Therefore, the reforms should ensure that the 1954 Act allows inclusion of relevant ESG clauses in renewal leases.
