This week, the Government set out an ambitious legislative package through the King's Speech. Here, we consider the two key messages relating to the living sector: leasehold reform and the Renters (Reform) Bill. In relation to territorial application, the proposals are said to affect both England and Wales; given the residential landlord and tenant law in Wales already diverges in significant respects to the English equivalent, we await further detail to understand the precise application.
In due course, we expect further details to be provided, including draft legislation in the form of a Leasehold and Freehold Bill (the Renters (Reform) Bill having already landed some months ago); we will provide further analysis at that stage.
Changes to leasehold
The Government will put forward the Leasehold and Freehold Bill, which will contain several long-promised reforms to the leasehold sector in England and Wales, including:
- Banning new leasehold houses – every new house in England and Wales will be freehold from the outset. The creation of leasehold houses will only be allowed in 'exceptional circumstances' – it is, therefore, an open question whether retirement communities will be considered such 'exceptional circumstances', as leasehold tenured houses are central to their operating model.
Operators in this area should also consider the related issue of estate rent charges, and the proposed reform in this area. Alongside proposals to reform estate rent charges (which are charges levied to ensure freehold houses contribute to communal service charges), the Competition and Markets Authority has an ongoing review in this area. As such, its recent working paper on the private management of public amenities on housing estates contains a number of suggestions including reform of the remedies for non-payment of rent charges, greater transparency in estate management charges (at the point of sale of a new build and subsequently), and empowering households to review and change estate management companies, and contest charges.
- Making it easier to exercise right to manage or collectively enfranchise mixed use properties – currently management can only be taken away from the freeholder via the 'right to manage' if no more than 25% of the floor space is commercial. Equally, residents in mixed-use buildings can only exercise their collective enfranchisement rights to buy the freehold if the commercial floor space is not more than 25% of the building. The Bill will increase that limit to 50% so that mixed-use buildings which currently have half the space used for commercial premises, will have the opportunity to exercise the right to manage and enfranchisement;
- Making it cheaper and easier for leaseholders in houses and flats to extend their lease, buy their freehold and take over management of their building;
- Increase the standard lease extension term to 990 years (currently the term is 50 years for houses and 90 years for flats), with ground rent reduced to £0;
- Removing a key requirement of lease extension that the leaseholder must have owned their house or flat for two years before the lease extension;
- Transparency on service charges – requiring service charges to be presented in a standardised, comparable format.
- Replacing building insurance commissions for managing agents, landlords and freeholders with administration fees – leaseholders should not have to pay excess commissions on top of the existing premiums.
- New consultation on capping ground rents – this builds on earlier legislation to reform the leasehold system Michael Gove has termed 'feudal' (ground rents having been abolished for new leases with The Leasehold Reform (Ground Rent) Act 2002).
- End ground rents for new, qualifying residential leasehold properties.
- Redress schemes – more freeholders will be required to join a redress scheme.
- Further rights for freehold homeowners on private and mixed tenure estates – these will be put on the same footing as leaseholders so that homeowners will also have access to redress schemes, transparency over estate charges and will be able to challenge such charges at Tribunal.
- Change to legal costs – currently there is a presumption that leaseholders will pay freeholders' legal costs for challenging poor practice. This presumption will come to an end.
Renters Reform – landlords of students, take note
We have previously analysed the seismic changes proposed to the rental market. The headline-grabbing points in the Renters (Reform) Bill include the end of 'no-fault' evictions and stronger grounds for possession (albeit delayed until court reform allows courts to better deal with the workload).
In the King's Speech, the Government reiterated its commitment to getting the Renters (Reform) Bill through; this commitment will be needed as parliament enters its final session before an election is likely to be called. Therefore, the three key issues from the King's Speech are:
- 'No fault' evictions will only end when the civil courts have been reformed – the end of 'no-fault' evictions will mean more cases are put through the courts, as fault must be proven by the parties with witnesses. Plans for court reform – including an increase in funding and digitising processes - which has been mooted for some time now.
- Landlords of students will have a new ground of possession – a big criticism of the Renters (Reform) Bill is that landlords of students in the private rented sector will no longer be able to grant fixed term tenancies and get back possession quickly; this is seen as a major issue which will prevent landlords from letting and vacating properties in sync with the student academic year. As things stand, the Renters (Reform) Bill exempts student halls of residence from these sweeping changes, and purportedly also exempts purpose-built student accommodation, 'PBSA' (although amendments are needed to ensure the PBSA exemption).
The Government has signalled it intends to deal with criticism that the Renters (Reform) Bill will harm the student rental market, by giving affected landlords a new ground of possession. Whilst we await further detail on this, it does seem unlikely to be the solution – possession will still take time and cost and will not give landlords the certainty that they will get vacant possession in time for new rentals at the start of each new academic year.
- Landlords will not have to meet EPC Rating C in their private rented domestic properties from 2025 – initially, the Government had suggested landlords would be required to upgrade homes to EPC Rating C. This requirement will not be taken forward.
Whilst not all the announcements are new, their inclusion in the King's Speech underwrites the importance of the housing market to the current Government; there is a strong emphasis on 'fairness' and tilting the perceived balance of power away from freeholders/landlords to leaseholders/tenants. In the area of Renters' Reform, it is clear that the Government has listened to initial concern over intervention in the student rental market, even if the proposed solution may not be welcomed by all.
We now await more detailed legislation/guidance to show the mechanics of how the Government proposes to put these measures into action. Expect further analysis as these explanatory documents are published.
For more information or queries regarding the King Speech and the living sector, please get in touch with Dominic Morris or Şenay Nihat.