Para 6, Schedule 8, Building Safety Act 2022 Paragraph 5: the permitted maximum

(1) In paragraph 5 “the permitted maximum”, in relation to a qualifying lease, has the following meaning.

(2) The permitted maximum is (subject to sub-paragraphs (3) to (5))—

(a) if the premises demised by the qualifying lease are in Greater London, £15,000;

(b) otherwise, £10,000.

(3) Where the value of the qualifying lease at the qualifying time exceeded £1,000,000 but did not exceed £2,000,000, the permitted maximum is £50,000.

(4) Where the value of the qualifying lease at the qualifying time exceeded £2,000,000, the permitted maximum is £100,000.

(5) Where the qualifying lease is a shared ownership lease and the tenant’s total share was less than 100% at the qualifying time—

(a) the value of the qualifying lease at that time is to be determined as if the tenant’s total share at that time was 100%;

(b) the permitted maximum is the tenant’s total share (as at that time) of what would otherwise be the permitted maximum.

(6) The Secretary of State may by regulations make provision about the determination of the value of a qualifying lease for the purposes of paragraph 4 and this paragraph.

(7) The regulations may in particular provide that, except in prescribed cases, the value of a qualifying lease at the qualifying time is to be determined by—

(a) ascertaining the consideration given on the latest disposal of the qualifying lease on the open market to have been made before that time, and

(b) if that disposal occurred before 2022, uprating the consideration in accordance with the regulations.

(8) In this paragraph “shared ownership lease” and “total share” have the meaning given by section 7 of the Leasehold Reform, Housing and Urban Development Act 1993.

Comes into force on 28 June 2022.

Applies to England and Wales.

Here we have the “permitted maximum”, alluded to in paragraph 5, but not revealed until this paragraph.

There are in fact four “permitted maximums”, which range from £10,000 up to £100,000, depending on the value of the lease.

The permitted maximum – also known as the “cap” – is the total amount that a leaseholder may be charged by way of “relevant service charge”. “Relevant service charge” is defined in paragraph 5.

I found that paragraph 5 demanded mental gymnastics. This paragraph is more straightforward.

Where the lease is worth up to £1,000,000, the permitted maximum depends on the location of the flat:

• If the flat is in Greater London, the cap is £15,000;
• If the flat is anywhere else, the cap is £10,000.

Those locations are identical to the provisions of paragraph 4.

In this second tier of leases, there is just one permitted maximum: £50,000.

In the third tier of leases worth more than £2,000,000, the permitted maximum is £100,000.

In summary, the contribution that a shared ownership leaseholder is required to make is commensurate with the proportion of their share.

Section 7(7) of the Leasehold Reform Housing and Urban Development Act 1993 defines shared ownership thus:

“shared ownership lease” means a lease—

(a) granted on payment of a premium calculated by reference to a percentage of the value of the demised premises or the cost of providing them, or

(b) under which the tenant (or his personal representatives) will or may be entitled to a sum calculated by reference, directly or indirectly, to the value of those premises; and

“total share”, in relation to the interest of a tenant under a shared ownership lease, means his initial share plus any additional share or shares in the demised premises which he has acquired.

It is therefore that definition that governs this paragraph of Schedule 8. 

Subparagraph 5(a) provides that a shared ownership lease is to be valued in the same way as other leases – it is valued as if the shared ownership leaseholder’s share was 100%.

Subparagraph 5(b) provides however that the shared ownership leaseholder’s cap is the leaseholder’s percentage share of the lease. That means that if a leaseholder has a 30% share, their contribution will be limited to 30% of the cap.

For example, if the value of the lease does not exceed £1,000,000 and the property is located in Newcastle-upon-Tyne, the leaseholder’s contribution will be limited to £3,000.

It is heartening to see Parliament taking account of a leaseholder’s percentage share in a lease. As a rule, providers of shared ownership leases do not do so for “normal” service charges.

How is a lease to be valued? That is a knotty, tricky, difficult question to which, on 28 June 2022, the date when this paragraph comes into force, there is no answer.

Subparagraph (6) grants to the Secretary of State the power to make regulations for valuing leases under both paragraphs 4 and 6.

Subparagraph (7) provides that “in particular” those regulations may value a lease by taking its latest sale price and “uprating the consideration in accordance with the regulations”.

“Consideration” in this situation means the sale price.

Whatever the shape of regulations made by the Secretary of State, if they are to contain a formula, that formula needs to be simple, easy, and cost-effective to apply.

It also needs to take into account the fact that some leaseholders may be asset-rich and cash-poor. Those leaseholders whose flats are worth more than £1,000,000 may have acquired their lease many years ago when property values were lower. If they are unable to make the contributions required of them, the risk of forfeiture looms large.