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:
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:
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.
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”.
These problems are becoming urgent as conveyancers are beginning to refuse to act for buyers of flats in high rise buildings due to the uncertainty, the resulting lender’s requirements and the risk of future indemnity insurance claims
Is it not possible to extend existing leases on terms whereby the ground rent is by agreement reduced to £1.00 p a in return fora capital payment? Or is that too simplistic a question?
In France owners of flats are their outright owners, forever and without payment of anything to anyone beyond the purchase price. However, The outside walls, roofs and other common parts are the subject of a “Reglement de Copropriété” and the Copropriété is run by a ‘syndicate’ which instructs managing agents “gérants” who organise the works decided upon by the ‘syndic’ at an AGM or EGM, all run rather like our UK private companies. All of this is controlled by the law of 10 July 1965. Of course, they have the usual problems we encounter of disagreement amongst flat owners, those who cannot, or will not, pay, etc., etc. However, they do not suffer from the external landlord problem which our lease system creates so that someone with an interest only in making money from his investment, which interest may be sold on to some even more avaricious investor at any time without the consent of, or even any prospective notice to, the flat owners is needed.
It might be instructive for those interested in this area of the law to study the French system. It could also be of use for them to look at the system of guarantees on new builds for ten years against minor and later on major defects. All this has to be backed by a bank guarantee in case of insolvency or non-performance for any other reason.
I do not pretend that the French have got everything right. Far from it, they have their problems too, but some tweaking of our system as a result of an examination of theirs my help, if only in some small way. I always find it ironic when I take a P&O Ferry, when running, from Dover to Calais that the block of flat at the Gateway is ‘controlled’ (sic) by UK law, but those on the seafront in Calais near the Hotel de La Plage, which I can heartily recommend for a very good seafood lunch btw, is subject to an entirely different regime.
As Andrew G says these problems are becoming urgent. Three solicitors declined to act for me when I was attempting to purchase a flat in a block, over 11 metres but under 18. The 4th said they would, but also stated once they had completed some enquiries they may advise not to buy.
Also in the light of this helpful article it would seem foolhardy to apply for a lease extension on purchase which I also wished to do. If conveyancers are declining to act (and nothing to do with any extension) then it may leave potential purchasers high and dry, as well as sellers and moreover what are lenders policies- will they refuse to lend ? not just because of conveyancers but because of the following:- The freeholder up until a couple of weeks ago appeared to have made no attempt to comply with the Act. How will this be policed ? Presumably lenders before parting with cash will want to ensure the act has been complied with in respect of the flat in the block they will be lending against.
Incidentally the estate agents selling seemed to have not a clue in relation to the act.