Written statement on Leasehold and Commonhold Reform - Nov 21

Housing Minister (Matthew Pennycook): Millions of homeowners across the country will remember with fondness the sense of satisfaction, pride and security they felt when completing the purchase of their first home. Given a free choice, an overwhelming majority of families would prefer to own their own home, and home ownership remains indelibly associated in the minds of many with security, control, freedom and hope.

Yet, for far too many leaseholders, the reality of home ownership has fallen woefully short of the dream – their lives marked by an intermittent, if not constant, struggle with punitive and escalating ground rents; unjustified permissions and administration fees; unreasonable or extortionate charges; and onerous conditions imposed with little or no consultation. This is not what home ownership should entail.

Over the course of this parliament, the government is determined to honour the commitments made in our manifesto and do what is necessary to finally bring the feudal leasehold system to an end. Given that millions of leaseholders and residential freeholders are currently suffering as a result of unfair and unreasonable practices, we appreciate fully the need to act urgently to provide them with relief. However, we are also cognisant of the significant complexity of the task and the importance of taking the necessary time to ensure that reforms are watertight.

With both of these imperatives in mind, I am today updating the House on the steps the government intends to take to implement those reforms to the leasehold system already in statute and to progress the wider set of reforms necessary to end the feudal leasehold system for good.

The Leasehold and Freehold Reform Act 2024

The previous government's Leasehold and Freehold Reform Act 2024 was passed in the wash-up period prior to the dissolution of the last parliament. In enacting only a select number of Law Commission recommendations relating to enfranchisement and the right to manage, the Act has rendered the process of holistic and coherent leasehold and commonhold reform more challenging.

However, while limited in nature, the Act did introduce a necessary set of reforms that will provide immediate relief to those leaseholders and residential freeholders subject to unfair and unreasonable practices. As set out in the King's Speech, it is therefore the government's intention to act as quickly as possible to provide homeowners with greater rights, powers and protections over their homes by implementing its various provisions.

However, we must balance speed with care if we are to ensure that the measures brought into force are to the lasting benefit of leaseholders and residential freeholders. The risk of acting with undue haste is not merely a hypothetical one. On assuming office in July, the Deputy Prime Minister and I were informed that the 2024 Act contains a small number of specific but serious flaws which would prevent certain provisions from operating as intended and that need to be rectified via primary legislation.

These serious flaws include a loophole which mean the Act goes far beyond the intended reforms to valuation and that undermines the integrity of the amended scheme. In addition we must correct an omission that would deny tens of thousands of shared ownership leaseholders the right to extend their lease with their direct landlord given that the providers in question do not have sufficiently long leases to grant 990-year extensions.

This government will not make the same mistakes as the last when it comes to reforming what is, without question, an incredibly complicated area of property law. While we intend to continue to work at pace, we will take the time necessary to ensure the reforms we pass are fit for purpose.

That is not to say that progress has not already been made. A number of the Act's provisions came into force on 24 July relating variously to legal costs associated with the remediation of unsafe buildings, the work of professional insolvency practitioners, and removing the remedy where homeowners risk losing their home entirely because of failure to pay an income-supporting rentcharge after 40 days.

On 31 October, the government activated further building safety measures. These help clarify that remediation contribution orders and remediation orders (which require developers and other relevant persons to pay for or fix defects) can be made in respect of interim measures, known as ‘relevant steps', such as waking watches and simultaneous evacuation alarms. They also clarify that costs of alternative accommodation, when leaseholders have been displaced from their homes on building safety grounds, and expert reports, can be recovered through remediation contribution orders.

Commencing the remaining provisions in the Act will require an extensive programme of detailed secondary legislation. While we appreciate fully the scepticism that leaseholders feel about yet more consultations, in some cases they will be necessary to determine precisely how certain measures are to be implemented effectively. To our frustration, we will not be able to bring other important measures into force, including the new valuation process, until we have fixed the small number of specific but serious flaws in the 2024 Act through primary legislation. Switching on the Act in full will therefore take time, but it is important that we get it right if we are to avoid the mistakes made by the previous government.

A good example of why appropriate secondary legislation must be prepared and scrutinised before even seemingly simple measures in the Act are commenced is section 49. This section provides for an increase in the non-residential floorspace limit for right to manage claims from 25% to 50%. This will broaden access to this right for a significant number of leaseholders by allowing those in mixed-use buildings where up to 50% of the floorspace is non-residential to make right to manage claims.

However, the way existing right to manage company voting rights operate mean that in some buildings with higher percentages of non-residential floorspace, freeholders not leaseholders will be able to control the right to manage company with more votes. For this reason we must amend right to manage company voting rights via secondary legislation in parallel with commencing section 49. If we do not do so, and simply activate section 49, new claims for the right to manage could result in these companies being set up only for the building's existing freeholders to have total control over them. This would be contrary to the intention behind the Act. Whilst we appreciate that leaseholders will be frustrated at having to wait for secondary legislation, this government will not commence the Act in a half-baked or incoherent way that could risk detriment to leaseholders.

With a view to effectively implementing the Act as quickly as possible, the government's intended sequencing for bringing the provisions of the 2024 Act into force is as follows:

We intend to commence the Act's provision to remove the ‘2-year rule' in January next year. This will mean that leaseholders will no longer have to wait two years after purchasing their property before exercising rights to extend their lease or buy their freehold, giving more leaseholders control over their properties from the outset.

We will bring the Act's right to manage provisions (expanding access, reforming its costs and voting rights) into force as a coherent package at the same time, in spring 2025, meaning more leaseholders in mixed-use buildings can take over management from their freeholders, and leaseholders making claims will, in most cases, no longer have to pay their freeholder's costs.

We understand that for many leaseholders the cost of living will be their primary immediate worry. For too long, leaseholders have borne the brunt of opaque and excessive costs being passed on to them. We will go out to consultation very shortly on the detail of the Act's ban on buildings insurance remuneration such as commissions for landlords, property managing agents and freeholders being charged through the service charge and their replacement with transparent and fair fees.

Next year, we will look to consult on the Act's provisions on service charges and on legal costs, bringing these measures into force as quickly as possible thereafter. Once implemented, leaseholders will be able to more easily challenge service charges they consider unreasonable and landlords will be required to apply to the relevant court or tribunal for approval before they can pass legal costs from such challenges back to leaseholders.

The Act includes measures that will make it cheaper for leaseholders to enfranchise – buy their freehold or extend their lease, giving them security over their property in the long term. Next summer we will consult on the valuation rates used to calculate the cost of enfranchisement premiums. Parliament will then need to approve the secondary legislation that sets out the detail, as well as fixing the Act's serious flaws in further primary legislation, before implementing the package.

The government remain committed to protecting residential freeholders on private and mixed-tenure housing estates from unfair charges. Next year we will consult on implementing the Act's new consumer protection provisions for the up to 1.75m homes that are subject to these charges, and bring these measures into force as quickly as possible thereafter. These include ensuring that homeowners who pay an estate management charge have better access to information they need to understand what they are paying for, the right to challenge the reasonableness at the First-tier Tribunal (in England), and to go to the tribunal to appoint a substitute manager.

It is important that landlords, agents and other key actors in the sector are aware of their responsibilities. As such, we will continue to work closely with delivery partners and stakeholders as we implement the Act, and look to future reform. We also look forward to working closely with the Welsh Government to bring about these much-needed reforms across England and Wales.

It is also vital that as many residential leaseholders and freeholders understand and take advantage of the reforms as they are implemented. The Leasehold Advisory Service will have a crucial role to play in that regard and we will set out further detail in due course about how we believe it can most effectively do so.

Further reform of the leasehold system

While we must fix the Leasehold and Freehold Reform Act and implement its provisions as soon as possible, we have always been clear that the Act does not go far enough. It overlooked a number of Law Commission recommendations relating to leasehold enfranchisement, enacted only eight relating to the right to manage and contained none relating to commonhold.

Moreover, it left untouched serious problems such as unregulated and unaffordable ground rents; the poor quality of service provided by some managing agents; the threat of forfeiture as a means of ensuring compliance with a lease agreement; and the prevalence of ‘fleecehold' private and mixed-tenure housing estates.

As part of our commitment to finally bring the feudal leasehold system to an end in this parliament, the government are determined to take action to address Law Commission recommendations omitted from the 2024 Act, to resolve a range of problems that legislation failed to grapple with, and to enact key pledges in our manifesto that it did not even engage with, such as making commonhold the default tenure.

In the King's Speech, the government made clear it would publish an ambitious new Draft Leasehold and Commonhold Reform Bill in this parliamentary session that would be subject to broad consultation and additional parliamentary scrutiny. Our intention is that it will be published in the second half of next year.

A central focus of the Bill will be reinvigorating commonhold through the introduction of a comprehensive new legal framework. To set out our thinking in advance of the Bill and invite consultation and discussion about how we finally transition away from leasehold, we will publish a White Paper on reforms to commonhold early next year.

Alongside setting out our plans for a comprehensive new legal framework for commonhold, we will take decisive first steps to making commonhold the default tenure by the end of the parliament. To that end, we will consult next year on the best approach to banning new leasehold flats so this can work effectively alongside a robust ban on leasehold houses. We will seek input from industry and consumers on other fundamental points such as potential exemptions for legitimate use and how to minimise disruption to housing supply. We will also engage on the conversion of existing flats to commonhold.

The Draft Bill will also consider a number of vital reforms to the existing leasehold system. The government remains firmly committed to its manifesto commitment to tackle unregulated and unaffordable ground rents, and we will deliver this in legislation. We will remove the disproportionate and draconian threat of forfeiture as a means of ensuring compliance with a lease agreement. And we will consult on new reforms to the section 20 ‘major works' procedure that leaseholders must go through when they face large bills for such works.

We also intend to act to protect leaseholders from abuse and poor service at the hands of unscrupulous managing agents. The previous government committed to regulate the property agent sector in 2018, even asking a working group chaired by the esteemed Lord Best to advise them how to do it. Yet, over multiple years it failed to take any action.

Managing agents play a key role in the maintenance of multi-occupancy buildings and freehold estates, and their importance will only increase as we transition toward a commonhold future, and so we are looking again at Lord Best's 2019 report on regulating the property agent sector, particularly in light of the recommendations in the final Grenfell Inquiry report. As part of our response to that report I can confirm that we will strengthen regulation of managing agents to drive up the standard of their service. As a minimum, this should include mandatory professional qualifications which set a new basic standard that managing agents will be required to meet. We will consult on this matter next year.

Finally, we are determined to end the injustice of ‘fleecehold' entirely and we will consult next year on legislative and policy options to reduce the prevalence of private estate management arrangements, which are the root cause of the problems experienced by many residential freeholders.