Don’t extend your lease if that puts you on the hook for building safety bills (this applies to non-highrises, too)

Another flaw in the Building Safety Act 2022 has stalled – perhaps killed off – a large part of the lease extension business, potentially involving hundreds of millions of pounds.

This is because a lease extended after 14 February 2022 won’t be protected from building safety bills covered by the new law.

Qualifying leases issued before 14 February 2022 receive certain protections under the Building Safety Act, but those issued after this date don’t. This is because a lease extension is a surrender and re-grant of a new lease as of the date of lease extension.

Yesterday afternoon – 21 April 2023 – the Government at last admitted there was a serious problem in an update to guidance:

https://www.gov.uk/guidance/qualifying-date-qualifying-lease-and-extent

The key paragraph states:

“If you are a qualifying leaseholder and you extend or vary your lease, you may surrender your existing lease and be granted a new lease. As the new lease will not have been granted before 14 February 2022, the statutory leaseholder protections in the Building Safety Act 2022 will not apply.”

It goes on to state:

“We are looking to legislate to resolve this issue as soon as Parliamentary time allows. In the meantime, before seeking a new extended or varied lease, leaseholders should seek legal advice and seek to come to agreements with landlords to apply the same protections as contractual terms.”

The last section is palpable nonsense: a) why would a landlord agree? b) does anyone expect them to vary the lease without charging? c) the leaseholder would need detailed legal advice to know if any variation would provide the relevant protections; d) a varied lease would add yet another layer of complexity to lease sales as the conveyancer on all future transactions will also need to check and agree the variation works.

The failure in the legislation draws in many more leaseholders than might at first seem to be the case.

At the moment, large parts of the Building Safety Act only apply to highrises that are more than 18 metres high, but the Act gives powers to the Secretary of State to expand the application of the Act in future.

It is unlikely that it will ever extend to a block of two maisonettes, but it may well extend to blocks of more than 11 metres high. These could easily be drawn into the Building Safety Act and face expensive new works.

The issue was raised in LKP’s interview last week with former building safety and leasehold minister Lord (Stephen) Greenhalgh:

Interview with Lord Greenhalgh: I don’t think the leasehold reforms will be in the King’s Speech

Lord Greenhalgh generously acknowledged that the matter had been raised at the drafting stage of the Bill by LKP.

The issue has also caught the attention of a growing number of lawyers who point out that the error makes the lease extension process more complex.

LKP’s advice until the government changes the legislation is: do NOT extend your lease if there is any chance your site may have building safety issues.

If, and when, the government does “legislate to resolve this issue as soon as Parliamentary time allows”, prospective changes should be easy. But leaseholders who extend before this legislation comes through will gambling that it can somehow be made retrospective. No doubt we will have a few landlords claiming their human rights have been breached if retrospective change is introduced.

The problem comes on top of another defect of the Act whereby if a site collectively enfranchises it also loses protections under the Building Safety Act.

Labour shadow minister Matthew Pennycook MP recently asked a written question about enfranchised blocks:

These blocks are also excluded from protections under the Building Safety Act in what ex-minister Greenhalgh accepts was a mistake.

Again, like lease extensions, what the government has done is kill the one thing it argues it wants to promote: which is more leasehold controlled sites.

So the position at the moment is that no site with potential building safety issues should seek to collectively enfranchise until the government decides what it wants to do to protect those which it says sit at the bottom of the protections waterfall.

Housing minister Lee Rowley’s response that the government would respond to the collective enfranchisement issue “in due course” is not reassuring.

Leaseholders are still waiting for the response to the Lord Best 2019 report on regulation of property managers; the 2020 Law Commission reports on leasehold reform; review of the Regulation SI 2020/632 that somehow allowed the addition of two storeys on top of other people homes under permitted development; and the 2014 commitment to the Competition and Markets Authority to review the section 20 consultation process.

Throughout the design of the Building Safety Bill officials made it clear that they had little or no interest in input from commercial and academic leasehold lawyers. The Act reproduces large sections of what everyone acknowledges is broken leasehold law that sit in the “when time allows …” bucket.

With both the enfranchisement and collective enfranchisement business now effectively shut down due to drafting errors in the Building Safety Act it’s perhaps time for the government to ask itself why its building safety team have been allowed to make such a mess of housing policy.

We either do want people to take control of their homes or not.

There are too many things in the Building Safety Act that discourage leaseholders from acting in their best interests.

LKP made a formal complaint about the recent Building Safety Director consultation that seeks to impose a third party director to deal with all safety issues. The government writes to advise:

“It is important for us to clarify that our intention is always to be as inclusive and transparent as possible when conducting consultations. We strive to involve all relevant stakeholders to ensure that we receive a diverse range of perspectives on policy proposals”

The problem is that’s exactly what it didn’t do. Instead of speaking to the Right To Manage / Residents Management company directors, the building safety team only spoke to those who might make money out of this role.

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The Association of Leasehold Enfranchisement Practitioners also wrote to housing minister Rachel Maclean on 17 April 2023 regarding the enfranchisement flaw in the Building Safety Act:

“This problem applies to new lease claims notwithstanding the motivation of the leaseholder. However, in many cases, leaseholders with long unexpired terms make a claim for a new lease under the 1993 Act simply to buy out the ground rent; they are not looking to make any other changes to the lease and such transactions are generally simple and straightforward. However, the doubt and uncertainty over whether in such circumstances the new lease can retain the protection under the BSA enjoyed by the existing lease will act as a significant disincentive to making a claim …

“The Government has made it abundantly clear that its overarching policy on reform of the leasehold enfranchisement regime is to make the process simpler, quicker and cheaper for leaseholders. However, application of the s.119 fails on all three counts.

“It is not made simpler because of the issue of whether or not the new lease is a “protected lease” under the BSA is now a complex issue; it is not made quicker because the uncertainty gives rise to a whole area of specialist inquiry to be undertaken before a claim can be made, and it is not made cheaper; not only because it raises the question of whether or not the removal of protected status gives rise to any valuation issues, but also because it necessarily involves incurring additional professional fees.”

ALEP concludes with a plea for a “very simple amendment to the legislation to make the Government’s stated intention expressly clear”.