The Leasehold and Freehold Reform Bill – Over to the House of Lords

Following publication of the Leasehold and Freehold Reform Bill (the “Bill”) on 27 November 2023, the Bill has been progressing through the legislative process and the Government has recently published the third version. The Bill, which applies mainly to England and Wales, has now been passed to the House of Lords following its third reading in the Commons this week. We now set out the further notable amendments to the Bill which have emerged below. 

Amendments

The Bill, as brought from the Commons, adds a further 43 pages. This is not a complete overview of the changes, however, we summarise what we consider to be the key amendments as follows:

1. A long-awaited ban on the sale of leasehold houses;
2. An amendment giving superior landlords a right to a share of the premium where a leaseholder has exercised rights to remove the ground rent;
3. Amendments to the Building Safety Act 2022 to widen the scope of remediation orders, remediation contribution orders and restrictions on service charge recovery.

Comment

Leasehold Houses

Selling houses on long leases has been a practice heavily criticised in recent years, leading to most of the major housebuilders now selling houses as freehold from the outset. It is also recognised as being a catalyst for the broader reforms following the 2017 White Paper.

That said, some new-build houses continue to be sold on a leasehold basis. Post the Third Reading, the revised version of the Bill introduces this ban, having been promised in the King’s Speech [Reforming the Housing Market: A word from the King] but notably absent from the Bill as introduced [Residential leasehold reform – draft legislation published].

The ban applies to what is defined as a “long residential lease of a house”, one condition of which is that the lease is for a “long term” which includes a lease granted for a term exceeding 21 years.

Despite the banning provisions now appearing in the Bill, certain leases of houses will continue to be permissible, including those of retirement housing, community housing and certain National Trust property.

A lease granted pursuant to an agreement entered into before commencement of the legislation will also be permitted, along with shared ownership leases, home finance plan leases, agricultural leases and certain extended leases of a house. Additionally, leases granted out of a superior leasehold interest where that superior interest was granted (or an agreement for it entered into) before 22 December 2017 can still be granted, since the superior leasehold owner does not own the freehold title in order to be able to sell freehold houses. The 2017 date is designed to prevent any avoidance schemes being created at this stage and will catch those which have been set up since the intention to ban these sales was first publicised. Some schemes will have been created since that date and transactions may need to be unpicked to enable sales. 

There is extensive provision on the regulation of permitted leases including in certain circumstances requirement for certification from a tribunal that the lease is a permitted lease. There will also be transaction warning conditions and new prescribed statements in new long leases for land registration purposes. 

There are redress provisions (including the right for the tenant to acquire the freehold for no consideration) and potentially significant financial penalties for where there is a breach of the legislation. 

Reduction of Rent in Intermediate Leases

We noted in our previous Law-now on this subject [The Leasehold and Freehold Reform Bill – Where are we now?] that the effect of amendments made at Committee Stage appeared to require superior landlords   to reduce the rent receivable by them but without any premium in return. This appears now to have been addressed so that the premiums can  be shared between affected landlords. 

Building Safety Act 2022 (the “BSA”)

The BSA is amended by the Bill and seeks to increase the scope of powers available in respect of “relevant buildings” (being buildings at least 11 metres high or with at least 5 storeys containing 2 or more residential units). 

Firstly, remediation orders which require a party to remedy a relevant defect (as defined in the BSA) are being widened. Not only can an interested person apply to require a “relevant landlord” to remedy a “relevant defect”, but they would also be able to apply to require the “relevant landlord” to take “relevant steps”. Relevant steps is a newly introduced concept and includes mitigation measures such as preventing or reducing the likelihood of a fire or collapse of the building occurring as a result of the relevant defect. 

Simultaneously, Schedule 8 of the BSA, which contains limitations on recovery of service charges for building safety issues, is amended such that the restrictions will also encompass the cost of any “relevant step”. 

Remediation contribution orders (requiring a party to contribute to remediation costs) are also expanded to include costs of expert reports and costs of temporary accommodation.

Finally, insolvency practitioners who become responsible for higher-risk and relevant buildings should be aware that, if the Bill is passed without amendment, they will acquire new responsibilities to provide certain information about the buildings to specified public authorities.