It is widely acknowledged that leases and leasehold interests have been the subject of criticism and government scrutiny during the past few years.
The Building Safety Act 2022 (BSA 2022) and its secondary legislation, have attracted similar attention. Parliament is turning its focus to considering certain longstanding issues, but also problems arising as a result of the new legislation.
Building Safety Act 2022 – "qualifying lease"
This article concerns "relevant buildings" which are those measuring at least 11 metres or five storeys in height. As many will know, most of the protections in Schedule 8 of the BSA 2022 only apply to "qualifying leases" which are defined by section 119.
The requirements set out in that section are that the lease must be a "long lease" (meaning a lease granted for a term of years certain exceeding 21 years) which was granted before 14 February 2022 and under which the tenant is liable to pay a service charge. At that date, the dwelling must have been the relevant tenant's only or principal home, or the tenant must not have owned any other dwellings in the UK, or the relevant tenant must have owned no more than two dwellings in the UK (apart from their interest under the lease in question).
As is evident from the above, much turns on the timing. The key feature for the purposes of this article is that in order to be a qualifying lease, the lease must have been granted before 14 February 2022 – also known as the "qualifying time". Leases granted on or after 14 February 2022 can therefore never be qualifying leases for the purpose of the protection of the BSA 2022.
Lease extensions
Leaseholders who own their flat may wish to extend the term of their long leases. This may be a statutory lease extension, where a leaseholder demonstrates that they meet the eligibility criteria in the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA). The process is governed by that legislation and may be referred to the First-tier Tribunal (Property Chamber) if the parties are not able to agree the terms of the new lease in circumstances where the leaseholder has established their eligibility. Voluntary lease extensions may also take place outside the criteria in LRHUDA.
The effect of a lease extension is that the "old lease" is surrendered and then immediately replaced by a "new lease" of the flat to extend the term (usually by a further 90 years).
However, the effect of the surrender and re-grant is that the "new lease" is granted after 14 February 2022 and therefore strictly will not be a qualifying lease for the purpose of BSA 2022 protection. This is the case even if the "old lease" was granted before that date and had been a qualifying lease.
Significance
Establishing that a lease is a qualifying lease for the purposes of the BSA 2022 is crucial as qualifying leaseholders can benefit from substantial protections in respect of landlords recovering costs associated with remedying relevant defects. In particular, qualifying leaseholders will not be required to make any payment towards cladding remediation, and amounts that can be recovered in respect of other remediation is likely to be severely limited or capped.
Currently therefore, given the above, in extending their lease pursuant to their statutory rights or by voluntary agreement, qualifying leaseholders will be surrendering their protections under the BSA 2022.
Proposals for change
The position set out above appears to be an unintended consequence of the drafting of the BSA 2022, and the government recently touched on the issue as part of a broader commitment to leasehold reform.
During a House of Lords debate on leasehold issues, Lord Kennedy of Southwark specifically asked when the issue identified above would be addressed.
Baroness Scott of Bybrook, the current Parliamentary Under-Secretary of State for the Department for Levelling Up, Housing and Communities responded by confirming the government's intention to legislate to remedy this issue, saying as follows: "As the new lease will not have been granted before 14 February 2022, the statutory leaseholder protections in the Building Safety Act will not apply. 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." She also indicated that Parliament was considering whether the change could apply retrospectively, therefore ensuring that any lease extensions that have taken place since 14 February 2022 also have the same protection.
Government guidance
Following the debate, the Department for Levelling Up, Housing and Communities amended its guidance in respect of leaseholder protections under the BSA 2022 to reflect the concerns raised and confirming the intention to legislate "as soon as Parliamentary time allows".
The guidance now suggests that in the interim period, while legislation is considered, leaseholders and landlords should take legal advice to agree to include contractual protections within any lease extension to deal with this problem. It also encourages leaseholders to contact the Department with details and evidence of landlords who are not complying with this request. This message clearly demonstrates that landlords should look to the "spirit" of the legislation, rather than avoiding obligations through an unintended consequence of the drafting.
The comments in the House of Lords took place within a broader debate regarding proposed leasehold reform which indicates that the current Parliament has intentions to overhaul the entire leasehold system. The Renters Reform Bill in respect of short-term lettings remains hotly anticipated, whereas draft proposals regarding leasehold reform more generally are suggested to arrive in the next session of Parliament, which begins in August 2023. Proposals for reform will come under even more scrutiny now that it has been reported that plans to abolish the leasehold system have been abandoned.
