Many of the 4.9 million residential leases in England and Wales will have new options and opportunities under the Leasehold and Freehold Reform Act 2024 which was included in the ‘wash up’ before Parliament was dissolved ahead of the July election and passed into law on 24 May.
To some extent, the Act is seen as a watered-down version of what was announced in the apparent Kings Speech in November 2023. Then again, for some people, nothing short of complete abolition of leasehold will do. Until that day, leaseholders, management companies, freeholders, and the many professionals who work with them will work to make the most change as it comes. The leasehold sector is estimated to account for 19% of the English housing stock alone, and its relatively smooth running is important to the economy and to millions of people. Government has a vested interest in its continual improvement.
The Act will eventually deliver a package of reforms to leasehold houses and flats. For flat owners, the key changes are related to the lease extension, marriage value, and service charges. Broadly speaking, it has received positive feedback from the leasehold sector although we probably all recognise that it isn’t the end of the leasehold reform story.
A key thing to remember about the 2024 Act is that reform isn’t instant. We now await the commencement orders that will turn on the new laws. Most of these are expected to come between 2025 and 2028 and at the discretion of a busy new government.
The few provisions that will come into force quickly, on 24 July include new approaches for blocks covered by the 2022 Building Safety Act and address situations where a landlord of a building with relevant defects is insolvent. There are also new measures to allow the recovery of legal and other professional service costs via the service charge for these buildings.
Original objectives
The original sponsors of the 2024 Act wanted to create a fairer and more balanced leasehold system for both leaseholders and freeholders.
The original Bill that was put to Parliament aimed to make it easier and cheaper for leaseholders to extend their lease or buy the freehold, to give leaseholders more control over the management of their building, and to protect leaseholders from unreasonable ground rents.
After rounds of consultation, debate, and amendments in Parliament, how well did they do?
What is in the Act for flat owners?
The headline grabbers are the right to a 990-year lease extension, up from 90 years in flats, and the abolition of the need to wait two years before having that right. Ground rent on new leases will automatically be a peppercorn – in effect zero.
There are also changes to qualification criteria for right to manage and enfranchisement claims in mixed-use buildings, where part of the building is commercial offices, shops, etc. The commercial use threshold share has been decreased from 50% to 25%.
It will become easier and cheaper for leaseholders to take over management of their building, allowing them to appoint the managing agent of their choice and exercise their enfranchisement rights to buy the freehold as they will no longer have to pay their freeholder’s costs when making a claim.
There will be greater transparency over service charges because freeholders and managing agents will need to issue bills in a standardised format that can be more easily scrutinised and challenged. That’s a change that will be welcomed by both sides where managers have nothing to hide, but perhaps don’t explain things as well as they might.
Marriage value is to be abolished. It makes buying a lease extension with less than 80 years to run much more expensive, as the freeholder is deemed to be losing out on the expectation of the property defaulting to them at the end of the lease term. So, a premium is added to the lease extension – 50% of the resulting increase in market value. Leaseholders can be trapped and must pay the extra if they want to sell because buyers often cannot get a mortgage on such short leases and anyone with a pressing need to extend a concise lease now, before the abolition is in force, should take advice. A first port of call is the Leasehold Advisory Service which has an online calculator offering a broad idea of the costs of lease extension.
The Act will make it easier and cheaper for leaseholders to challenge their landlords’ unreasonable charges at Tribunal by extending access to redress schemes for leaseholders to challenge poor practice.
Freeholders, who manage their building directly, will have to belong to a redress scheme so leaseholders can challenge them if needed, just as managing agents already do. However, some people have questioned the Courts’ capacity to cope and manage cases in a timely manner. The presumption that leaseholders pay their freeholders’ legal costs when challenging poor practice is also being scrapped.
We were particularly pleased that opaque and excessive buildings insurance commissions for freeholders and managing agents will go and be replaced by transparent and fair handling fees.
Buying or selling a leasehold property is also going to become quicker and easier because the Government will set a maximum time and fee for home buying and selling information.
These are all practical changes that will affect anyone responsible for managing buildings and you need to prepare. Social media channels suggest there will be a surge of leaseholders asking for lease extensions, often unaware that the law isn’t yet in force. Others, who are already in negotiation or are about to buy or sell a flat may be confused about whether and when to go ahead and should take individual, independent advice.
What did not make it to the Stature Book?
Most conspicuous by its absence was a cap on ground rents, whether that be at £250, a peppercorn (nil), or otherwise has been dropped Can you still charge ground rent? – Deacon
There had of course been a lot of consultation on the topic but in the rush to get the Act through before Parliament was dissolved there was no time for the sufficient scrutiny that it takes to make good law, and reform did not quite cut. This will be a disappointment to those ‘trapped’ with leases that allow for escalating ground rents, and the matter is surely not going to go away until the Government in power addresses what so many people see as historical wrongs once and for all.
Other measures that have fallen by the legislative wayside, for now, include barriers to accessing energy efficiency measures, mandatory qualifications, and regulations for those that manage the life safety of residents. However, as we said before, leasehold reform is a work in progress … so let’s wait and see.
Disclaimer:
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
FP1062-2024