The impact of the Leasehold and Freehold Act on local authorities

The Leasehold and Freehold Reform Bill has now been enacted, and its impact on local authorities is likely to be substantial when it comes into force.

The legislation would impact on local authorities’ finances in at least three ways: changes to the length of residential property leases will reduce their value to local authorities as freeholders; income from lease extension, enfranchisements and ground rents will be reduced and the ability for leaseholders in mixed use buildings to take on the freehold and management of their property will introduce a number of complexities. Additionally, a possible move towards commonhold would create new complexities in property management.

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 exclusion of marriage value from premiums. Simply put, marriage value is the profit released by combining a freeholder’s 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 to the detriment of freeholders, many of whom are local authorities.

It is very difficult to quantify this impact as each local authority’s property portfolio 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 premium value of all leases owned by the council and reducing this by a third. The legislation does not propose any form of compensation to those impacted by this change.

A further proposal in the overall reforms was to reduce existing ground rents to ‘a peppercorn’ (zero financial value). This appears to have been parked for now, although the Act provides for ‘onerous’ ground rents to be capped at 0.1% of the freehold value. 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 and so dropping this proposal to ‘peppercorn’ ground rents across the board seems sensible.

The impact of the legislation will be compounded by a revised allowance brought in by the Act which increases from 25% to 50% the ‘non-residential’ limit which prevented leaseholders in mixed use buildings from buying their freehold or taking on the management of their buildings. The change will 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 could fall to the local authority to rectify the situation.

The Association of Leasehold Enfranchisement Practitioners (ALEP) has supported leasehold reform for many years and welcomed the Bill in principle. But the resulting Act simply doesn’t support one of the government’s principles, which was to ensure sufficient compensation for landlords. It will almost certainly also make short leasehold properties more expensive to buy. There is also concern throughout the industry over uncertainty of when the relevant valuation elements of the Act will come into force. It has been suggested this could be some time in 2025/2026. In the meantime, leaseholders will need to take further advice whether to press ahead under current legislation, or wait for parts of the new Act to come into force.

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 Act. And the further complications that it brings will only add to local authorities’ challenging financial circumstances.

As some of the secondary legislation in relation to the Leasehold and Freehold Reform Act, including a decision on ground rents which we anticipate will follow the government’s response to its earlier consultation, and the significant issue of prescribing capitalisation and deferment rates, remains to be determined after the general election, the opportunity remains for those who will be impacted to register their concerns through their MP and any further consultations.