Jeremy Dharmasena, head of Leasehold Reform & Litigation, Knight Frank, looks at what the Leasehold and Freehold Bill will mean for local authorities.
As local authorities digest the impact of Wednesday’s Budget and their own changing financial circumstances, the potentially seismic impact of the Leasehold and Freehold Reform Bill risks being overlooked. But the impact could be substantial.
Rushed through the Commons after its announcement in the King's Speech in November, the Bill is now entering the Lords, with its Second Reading due to take place there imminently.
The proposed legislation would impact on local authorities’ finances in at least four ways: changes to the length of residential property leases would reduce their value to local authorities as freeholders; income from lease extension, enfranchisements and ground rents would be reduced; a move towards commonhold would create new complexities in property management and; a proposal to allow leaseholders in mixed use buildings to take on the freehold and management of their property would introduce a number of complexities.
In my experience of advising local authorities on their landholdings, I have seen that their potential to generate income from property investments is considerable and this is crucial to supporting services including social care, police and fire services, transport and highways, refuse collection, cremation and burials, education and cultural services.
My first concern is the proposed abolition of marriage value. Simply put, marriage value is the profit released by combining a freeholder and leaseholder’s interests in a property. Currently, to extend a lease which is less than 80 years, a leaseholder must pay 50% of the marriage value to the freeholder. The removal of marriage value artificially reduces the premium payable by the leaseholder and the situation will be detrimental to freeholders, many of whom are local authorities.
It is very difficult to quantify this impact as each local authority is different and the marriage value of each lease relates to its unexpired term. A rough assumption of the impact can be made by calculating the value of all leases owned by the council and reducing this by half. The Bill does not propose any form of compensation to those impacted by this change.
A further proposal within the Bill is to reduce existing ground rents to ‘a peppercorn’ (zero financial value). This change is understandable in the case of leasehold homes with ‘onerous’ ground rents (usually taken as being more than 0.1% of the freehold value). But many local authorities (along with charities and other non-profit making organisations) derive substantial income, quite legitimately, from ground rents, which fund both the management costs of the properties themselves and council services.
This aspect of the legislation would be compounded by the proposal to increase from 25% to 50% the ‘non-residential’ limit which currently prevents leaseholders in mixed use buildings from buying their freehold or taking on the management of their buildings. The proposed change would enable tenants to assume a management responsibility but in many cases they would lack the means of doing so – financial or otherwise. And should the new owners of the lease abscond, it would fall to the local authority to rectify the situation.
The challenges associated with the proposed changes must be balanced against the limitations of the status quo. The Association of Leasehold Enfranchisement Practitioners (ALEP) has supported leasehold reform for many years and welcomed the Bill in principle. But the detail within the Bill simply doesn’t support one of the Government’s principles, which was to ensure sufficient compensation for landlords. It will almost certainly also make leaseholds more expensive to buy.
As Mark Chick, director of ALEP said when the Bill was announced in November’s King's Speech, ‘Leasehold is very much embedded in property law and is effective in most circumstances. With some necessary adaptations, it can continue to remain effective. Commonhold is available although as is widely recognised the version currently on the statute books is not yet fully “fit for purpose.” The fact that there are currently more books on commonhold than there are instances of it speaks volumes about the prospects of effectively abolishing leasehold in a hurry. Whilst Commonhold will no doubt be a feature of the residential legal landscape of the future, leasehold is likely to be part of the way residential flats are owned for many years to come.’
While a move towards commonhold may sound attractive initially, the two problems inherent with leasehold properties – that a building will require maintenance and that someone will have to pay for that maintenance – are not obliterated by the Bill. And the further complications that it brings will only add to local authorities’ challenging financial circumstances.
As the Leasehold and Freehold Reform Bill progresses through Parliament, the opportunity remains for those who will be impacted to register their concerns through their MP and any further consultations.
