November 20, 2023

Will leaseholders be happy with the Government’s proposed reforms? | Legal Thinking Podcast

This podcast transcript has been edited in places for readability. You can also listen to our podcast on your podcast platform of choice - find it here >

In today's episode, we are talking about the leaseholder reforms, that were recently announced by the government in The King's Speech. This podcast, for context was recorded on the 9th of November. Our guests today are our very own Peter Foskett, who's a real estate lawyer in our RWK Goodman team, as well as Harry Scoffin, who's a founding director of Commonhold Now and has been campaigning for leaseholder rights for years

So first, just to get started with, can you give a brief overview of the recent leasehold reforms announced by the government and their significance for homeowners in London and around the UK? Harry, do you want to kick us off with that one?

Harry Scoffin: Yes. So they're going to make it easier and cheaper for existing leaseholders in houses and flats to extend their lease or buy the freehold. Why that's important is at the moment there's really complicated rules about who qualifies to buy the freehold. So if you've got some shops, for example, or you've got a hotel or any other commercial space over 25%, you can't buy your freehold. And even with extending the lease, particularly for those people that are got less than 80 years left to run on their lease, and banks don't like that at all, they pull mortgages - that can be cripplingly expensive because of marriage value. So doing things like that is going to be very good. And instead of you extending your lease, if you're in a flat for 90 years, you'll be able to get one that's an extension of 990 years. So that's a huge difference, because what it does is it moves the financial value out of the hands of the freeholder or the building owner and into the hands of the homeowner - the consumer.

Just on that point that you mentioned the lease extension terms from 90 to 990 years, could we perhaps go into a bit more detail about the implications of this change for leaseholders, and how it addresses the existing issues?

Harry: Absolutely. So there's this perceived unfairness about the fact that people are paying a premium to extend their leases just for 90 years, and, you know, you'll always have that wasting asset problem, and there's a whole army or industry that's grown up about basically helping leaseholders extend their leases. And another beautiful thing about moving it to 990 years away from the 90, is that when it comes to buying the freehold, the value will be will be much less - you know, the cost for the leaseholder to buy that freehold will be less, because the majority of the financial value will be in the hands of that leaseholder, and ideally, all their other neighbours who have had these 990 years extended onto their leases.

Peter Foskett: I'll just say, another point is that those 990-year leases will be at a peppercorn rent. So again, it's taking out that -the issue of paying rent and the things which covered as forfeiture, and also the very fact that it increases the value of the freehold.

Harry: Absolutely. That's a huge change.

Peter: Well we will talk about forfeiture hopefully later. But you know it is a very draconian remedy for which landlords or lessors, freeholders, whatever we want to call them, have. And again, you know, one of the things from this Bill is that all future houses must be freehold. It can't be leasehold. And that is actually taking away one of the big risks which homeowners have if they're renting lease – sorry, if their inverted commas ‘owning’ a leasehold.

So just on that point, one aspect of the reforms is a ban on building new houses as a leasehold. But this doesn't apply to flats. Can you clarify the reasoning behind this distinction and how it might impact homeowners?

Harry: That's a really good question. The problem is, is that there are very, very powerful vested interests in keeping the leasehold – what I call gravy train – on the rails. This is a multi-billion pound industry in other people's homes, and it is infuriating to hear that not only have they dropped this commonhold concept, which could have been a great way of organising at least future flatted developments, so bringing us more into line with the systems in Scotland, America, Europe, across Asia and Australia, where they have systems of tenements, condominium, co-ownership, cooperative or if you're in Australia, New Zealand and parts of Southeast Asia and even the Middle East, strata title, where you buy the flat, you own it outright on a freehold basis, and you own a share in the common parts, and you own a share in the land.  And you would appoint the managing agent, and you'd be a little bit like Alan Sugar on The Apprentice, if you're not happy with a contestant - or in this case a managing agent or a contractor, you can say you're fired - and you get someone else in who will be doing a better job and at a better price. So they've dropped commonhold, which would have been the solution, at least for future flatted developments. But they're not even saying that going forward, all new flats would be sold on a leasehold basis, but with the freehold handed to the residents, and why that's so important is that the real money is in leasehold flats. Actually banning future sale of - of houses on a leasehold basis is yesterday's scandal. So the government have ducked this…

Peter: Just to put a bit of optimism in, I think one of the big positives is that actually the King's Speech announces a Bill, as there was speculation and concern, whatever you want to call it, that it might actually be completely lost, and I think just getting it on the floor of the house, that is a big positive step. Already a number of conservative MPs, either very openly or not so openly, have said they will look to make good the shortfalls in the Bill, which Harry has just been highlighting, one of the biggest shortfalls, and equally up in the House of Lords, there's others there willing to challenge the government about what they haven't put in – what Michael Gove had previously promised or said would be in there. So the very fact we've got a Bill to be at least give some hope that we may get something better when royal assent is given to it than we've got at the moment. But Harry’s absolutely right, the government has actually missed the real target, which is enabling leaseholders of flats to have control of their expenditure, to control their fate. It's just not there.

Harry: And I think Peter is spot on there about the fact that we've even got a Bill, because when we launched this campaign, Commonhold Now and leasehold for real home ownership in March, we heard from a number of very well-placed sources inside government, but outside too, saying that, you know, Rishi Sunak, you know, he'd become prime minister middle of last year, he's got one Queen's or King's speech to actually deliver the priorities that he wants to see delivered. And leasehold just wasn't on there. So in a way the conservatives - it's brilliant that we've got that Bill, but there's no doubt about it that it was because of leaseholders literally getting so fired up about this, and all of the pushback and all of the stories we've been placing in the media, and we've been causing rows left, right and centre, and stirring up controversy and getting the political parties to fight each other about who's going further and faster to help leaseholders that this Bill has happened.

So part of it is that residents in mixed use developments, will gain the right to manage.So you've mentioned about the right to manage previously; could you elaborate on what the right to manage entails and how it benefits homeowners?

Peter: Well, really under reform you’ll need a 50% vote to actually take over the provision of the services to a building. So it separates off the freehold ownership from the provision of services. So really, if you look at it, you've got the freehold owner owns the building, and will be employing managing agents to provide the services. Really the right to manage company are the leaseholders of that building, and they are in practice - will be the ones employing those managing agents to provide the services. It's a technical piece of legislation for achieving it, and it's certainly not a simple process. And Harry's highlighted the issue of getting the sufficient majority, but that's the basis of it, is to enable the leaseholders to take control over the provision of services to themselves, and to be able to control the costs and the quality of the services and not leave those issues to the freeholder. But the freeholder generally will usually stay there, which is one of the issues from this at the moment, is that the government are going to continue consulting upon what you do with existing leases and the rents out of existing leases, because this is going to be one of the ongoing problems. New leases without any rent, apart from a peppercorn, of leases will still be subject to a rent. And we're going to end up with a two-tier market. So the poor old existing leaseholders are going to suffer a double whammy. And the government is struggling to decide on what they're going to do for existing leaseholders. And it starts feeling like the ever-ongoing issue over business rates, that the government just cannot find a solution. And all the time it doesn't resolve the situation for existing leaseholders - is leaving them in a very untenable position.

Harry: Very quickly, on the 25% rule, that is very significant because for anyone with mixed use, you know, and in mixed use block where you might have some offices or shops or a hotel or service apartments or a GP surgery or something like that, you'll be able to get the right to manage, you'll be able to get control. And what's really interesting about this point is that in what was announced in this Bill and again, caution, we've not seen the detail of this Bill, and we may not for a number of months to come - but the fact is, is that this was one of the few policies that they hadn't already previously announced. And it was something that I understand that the freeholders were really lobbying aggressively against for the last few years. The Law Commission actually proposed it in 2020 that this 25% becomes a 50%. So it means as long as the leaseholders or the the residents are in the numerical majority in terms of floor space, they will be able to get control. And interestingly, I'd heard rumors that the government were going to allow that on right to manage, but as Peter was just saying that, yes, you've still got the freeholder issue, because they can be breathing down the neck of the lea seholders controlling that RTM company, and will always be trying to trip up that RTM company, and if you've got commercial premises, they could use a commercial premises to blow up the RTM company by withholding service charges – there's famous cases on it at the moment with court appointed managers, basically they were going to say just for right to manage - the fact that we've now got that, as a commitment on enfranchisement is huge. And actually really interestingly, the Law Commission originally said they would keep 25%. And, you know, without sounding arrogant, I was part of an absolute push back on that and organizing leaseholders up and down the country to say - actually that's wrong. Because the original premise of Right to Manage was introduced by Tony Blair's government in 2002, was that you've got to be in a predominantly residential building. And our argument was, well, 25% of the building isn't really predominantly residential. As long as residents are in the 50% or in the majority, they should be able to get right to manage and buy the freehold. So we've won that argument. But the question is, is that, as Peter said earlier, that that's a great victory in of itself, but for most of these blocks, we've got high levels of overseas - you know, buy to let landlords, trying to get buy in from them to get 50% is almost impossible. So we hope that the government and we will fight for it, can actually be a little bit more relaxed on this idea of you having to get half of all of the leaseholders to - to claim the right to manage.

Peter: Then going back to what I was saying before about - there's a good likelihood of when it hits the floor of the House, the Bill will be improved, and one of the things going forward is to extend the service charge protections, which flat owners enjoy to house to leasehold or freehold house owners. What hasn't been extended is this right to manage concept. So freeholders on estates will be given the ability to challenge service charges - what would be a really good improvement in the Bill, would be to extend right to manage, not just to leaseholders in a building, but leaseholders and freeholders on an estate, all in their individual houses paying service charges for estate services.

Peter, you touched upon this earlier, but there's a call for an end to forfeiture, which is often used to pressure leaseholders into paying inflated service charges. Can you explain what forfeiture is and how it affects leaseholders?

Peter: Yeah, it's a very old remedy. I mean, basically it's not a lease. The landlord has the right to end that lease - it's called forfeiture, if you don't pay the rent, or you don't perform your covenants. Generally - well in theory it can be the most minor of breaches. Generally in leases you'll see that qualify so that there's a materiality test, and behind that the court says so that if your lease is forfeited, then you have the right to go to court as court to petition for relief, to basically have your lease given back to you. But these are all terribly expensive, complicated procedures. The basic principle is if you're a breach of the lease, the landlord can terminate it, with no compensation back to you. So if you take out a mortgage and you don't pay the mortgage, the lender can take the property back and sell it, and any surplus over the loan you get back. Not so with forfeiture - you lose everything. You might have spent £1 million buying your leasehold property, if it's forfeited, it's gone. And it is such - in this day and age, it is such a disproportionate remedy. Its place really belongs in the commercial world, with short term leases, so if you rent a building for five years and you're a bad tenant, you can understand that the landlord should have the right to say – you know… that's - you're out. You've not paid your rent, you've let the place go to rack and ruin, but it doesn't belong in the residential world.

Harry: And yeah, very quickly on that, that there's been actually multiple attempts to try and reform forfeiture to get rid of that windfall to the freeholder. Because, as Peter was saying earlier, is that there's no balancing payment or there's no return, lesser debt, which is huge. So in 1994, the Law Commission drafted a Bill on sorting out forfeiture. And then in 2006, it put forward a series of recommendations, actually report to the Labour government. And actually, this conservative government - I think it was the Boris Johnson government, but yeah, conservative anyway, they asked the Law Commission to update their 2006 report to bring those recommendations into line with what else the Law Commission recommended in 2020, and the fact that there's nothing on forfeiture, at least in this government briefing pack that accompanied the King Speech, is very worrying. Now, you may ask, well, how many successful forfeitures there are a year, it's estimated between only 80 to 90. That's 80 to 90 households potentially going homeless. But it's the threat of forfeiture, as you said earlier, that, you know, that gets leaseholders rightly very worried and it forces them to pay some excessive demands from the freeholders. So and I think that's something whereas Peter was saying earlier, that's something that could easily be amended, when this Bill comes forward to say that there is forfeiture still allowed, but that the remaining equity is handed back to the departing leaseholder.

Peter: And there's a problem on mortgages as well because lenders will not lend on a lease where you just have forfeiture. So the more reasonable leases, shall we call them that, have extra provisions in them that say there’s forfeiture, but a lender has the right to or has to be notified and has to remedy the breach, before forfeiture can occur. But other leases don't have that in. So those properties can't be mortgaged, and therefore, if you're trying to sell a buyer can't get a mortgage without that being varied. So it's the case of going to the freeholders saying, you know, almost cap in hand, saying - you know, please agree a variation to my lease to insert these provisions to protect a lender. So it has that problem but also in the market.

Hopefully on a more kind of positive side of things, back to the - just following the Leasehold Reform and Ground Rents Act of 2022, which put an end to ground rents for new and qualifying long residential leasehold properties in England and Wales, could you discuss the impact of that act on this? Is that a positive thing? How does it align with the kind of the hope to reforms for leasehold?

Peter: By having that reform rent couldn't be charged out of houses. We see a massive decline in the number of houses that have been sold leasehold, because that benefit has gone. I see it all – the government’s trying to see -trying to achieve change by the back door, by taking out the profit elements from residential development and residential investment in the you know, you no longer can have a rental income because all new houses have to have a peppercorn rent. Greater challenging of the service charges - so again, taking out some of the profit that can be made. And there seems to be the government's approach really is sucking out the value rather than tackling the problem head on.

Harry: Yeah, absolutely. I think there is that element of they're trying to nudge developers and and freeholders into doing the right thing. But and the theory behind banning ground rents on future leasehold houses and future leasehold flats, which is what this Act was supposed to do last year, is the idea is - is that when you've removed the legitimate income stream, the sole income stream in leasehold that you know freeholders have a right to, or developers could then sell on to investors in Monaco, Cayman Island, Jersey, wherever, that if you get rid of that, developers would be more relaxed about adopting commonhold where there obviously are no ground rents, or even forget commonhold for a minute, just saying - well, here you go residents, you've all bought flats in this development, here's a freehold owning company, and you're all members of it and you appoint the managing agent. I do not believe we've seen that really in a great way in the market. There's one or two exceptions in the market. So that's why it's so surprising that the government, in this Bill aren't following up and saying - well, yes, we've banned ground rents for future flats, but it's clear that we need to have a requirement to say that the freeholds on new flatted developments are to be handed over to the residents once a certain number of flats have been sold, and then the developer moves on.

Peter: Coming back to you saying about positives. I mean, I think there's this concept of extending leases or buying in the freehold if it's a house, making it cheaper and easier, and we've all got to see the detail, but that could be a real positive. Because at the moment, and I know this from the personal experience of my family, at the moment extending your lease is a very expensive and stressful procedure, as it's just you just seem to be paying money all the time and getting nowhere. So if it can be made simpler, if it can be made cheaper, that that that is a real positive.

Harry, you've outlined some of the shortcomings that you see in the current reforms, and I think we've touched upon maybe a few of these already. But what alternative measures would you advocate for? 

Harry: Ideally commonhold. But I think the ship on that one has sailed. But at least saying that all new flats must come with a share of the freehold, and that the residents have control and they appoint the managing agent from day one. Because what doesn't make sense is parliament has passed a series of laws, sometimes of bewildering complexity, over the decades, that allow leaseholders to compulsorily buy the freehold. So it doesn't make sense to then say - well, we're not just going to hand over the freehold to begin with on new developments. So that's a key issue. Another one is if we are going to bring forward changes to Right to Manage, you have to bring down that 50% participation threshold.

I interviewed Barry Gardiner MP the other week - he was fundamental to the 2002 Act with the last Labour government, and he at the time was very brave - because he had just been newly elected for the first time as MP in 97, and he's obviously putting his political prospects, you know, his career on the line, and he said at the time that that Bill didn't go far enough. And Labour, famously in 1995, when I was one year old, had promised an end to feudalism in a document written by Nick Raynsford and the late Frank Dobson, and they had said that they'd bring in commonhold, and that all future flats would be sold on a commonhold basis. And unfortunately they also, like this Tory government, caved in to the vested interests.

So I think if we're not going to get commonhold on all future flatted developments, at least say that freehold has to be vested in a resident management company and that all those flat buyers, they control it from day one. So that's number one.

Number two, that right to manage, as Barry Gardiner was saying in the interview with me the other week, it has to be brought down 50% is almost impossible, unless you've got maybe five or six units, you're never going to hit it. And actually 60% of leasehold property is rented out. So that is a real, real issue of organization. And even when you are very well organized, very, very difficult. So that's another thing. We also want to see action on ground rents. So that is good news that there's a consultation. There's big questions about the human rights of freeholders. So there are, you know worry among the leaseholder community that this consultation is about flying a kite. You know, the government showing that it cares about existing leaseholders. But in terms of whether they've run out of time to get something meaningful on kind of either capping or reducing or banning ground rents altogether, for existing leaseholders, that may be seen as out of scope of the Bill.

But another thing that we want is changes to forfeiture. It's not right that, you know, as Peter was saying earlier, that, you know, you may be disputing a £3,000 Bill, and you bought the flat for £300,000 or bought the lease rather, you don't own it, or you didn't buy the flat, but for 300,000 and the freeholder gets the whole 300,000. And obviously there are regulations to try and make sure that, you know, if it does go to the court, you can get relief. But it is a very complex, very stressful process. That could easily be a tweak to say that the equity, less the debt, would be returned to the departing leaseholder. So that's another thing. And another thing is, at the moment, anyone can be a freeholder and anyone could be a managing agent. You could even set up one of these companies, hoover up the freehold to people's homes, or become a managing agent, handle hundreds of thousands of pounds of other people's money and have a criminal record. And the government were urged - well, actually, there were more than urged, they were given a report by Lord Best in 2019, about how such, you know, statutory regulation scheme of managing agents could work. And all these years later they've not responded. So I hope that we can get some concessions on things like regulation of of managing agents and freeholders. But the key thing is, if they are going to do right to manage, they are going to do enfranchisement, they've got to make sure that the qualifying criteria is liberal as possible.

Great. Thanks, Harry. And just to pivot slightly, how is the government addressing the issue of net zero emissions, and energy efficiency in the context of property and tenancy law? Like what implications does this have for landlords and renters? Because I know there's like changing bans and requirements and stuff like that recently. What's changing - how is it affecting people?

Peter: Well, that's a good one. I mean, I think the one thing is, which we've seen on a number of subjects, there's a bit of a pullback in that the proposal that all rented properties should be an EPC standard of C from 2025, certainly in the private rented sector that is being scrapped. So in some ways that's a sort of a fall back. I think really in the residential market, it's more through the planning system and building regulations. I think that we're seeing building regulations put new houses or new buildings generally, improving all the time, requiring greater insulation. And that really is how it's being addressed. But in terms of what we're seeing in this legislation, this King Speech, is actually a slightly backward step saying, well, we've done more - Rishi Sunak says we’ve done more than most of Europe, so actually we can slow down a bit. So that's what that's what we're seeing here in this King’s Speech.

Harry: I think with the environment side of things, they've kind of - they seem to because we don't have the detail of the bill yet, ignored this issue of major works. So when freeholders want to tosh up property or, you know, put in improvements - a lot of leases don't permit it, but if they want to do something about energy efficiency right now, they're incentivized to go for the most expensive quotes or giving, you know, contracts to related companies or suppliers. And the fact is, is that unless there's changes to that, you're not going to get a lot of leaseholder support for eco upgrades. And, you know, you don't need to take it from me, The London Assembly - their planning and housing committee, over a decade ago, they did put out a report called Highly Charged Residential Leasehold Service Charge in London. And they found and - this is a quote - there is evidence that some large property companies have awarded contracts to subsidiaries of their own company inflated prices. And the thing is, even on the marking up of of these major works builds, there's also a question of quality of the works. Because, you know, take my own building, we had to pay over £1 million to put some electricity meters in, and they've gone for the lowest tech kit known to man, and it should have only cost - we've costed it, we've - brought experts in only £300,000. So the fact is, is that there's no emphasis on value for money. And I think unless the law changes on that, you're not going to really - we're not going to move in a net zero direction, at least for leasehold, you know, existing leasehold blocks of flats.

Peter and Harry, thank you very much for your time.

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