Leasehold and Freehold Reform Act – changes for leaseholders and landlords

The Leasehold and Freehold Reform Act 2024 (the “Act”) became law on 24 May 2024, before the dissolution of Parliament. Although it has not yet come into effect, the Act introduces a number of important changes for both leaseholders and landlords.

Changes for leaseholders

The Government has recognised the major issues that come with being a leaseholder and the flaws in the current system. As a result, the Act introduces a vast number of changes which aim to increase the protection of leaseholders. Despite the Act being rushed through to be passed before the dissolution of Parliament, the changes and protection now granted to leaseholders is substantial.

The Act aims to strengthen the rights of the leaseholder by:

• Making it cheaper for leaseholders to buy their freehold or extend their lease.
• Removing the two-year minimum requirement of ownership before a leaseholder can extend their lease or buy the freehold.
• Increasing the standard lease term to 990 years for houses and flats, instead of 50 and 90 respectively. The Act also abolishes marriage value, which was payable by leaseholders for leases under 80 years.
• Introducing a standardised format for service charge bills that can be more easily challenged by leaseholders. Details of planned major works in a year-end report will need to be provided to leaseholders. This will also be supported by the introduction of redress schemes for leaseholders to challenge poor practice by freeholders rather than just managing agents.
• Leaseholders, in most cases, will no longer be liable for the freeholder’s costs when exercising their right of collective enfranchisement.
• Leaseholders will also find it easier and cheaper to form a Right to Manage company, as well as being able to select their own managing agent when they take over management of the building.
• Excessive building insurance commissions are banned for freeholders and managing agents.
• Implementing a ban on the sale of new leasehold houses, with freehold to become the standard, bar a few exceptions which include shared ownership properties, community-led housing and inalienable National Trust land and excepted Crown land.

What does the Act mean for landlords and freeholders?

A major change for landlords will be in their ability to recover costs from tenants. Under the Act, the leaseholder is now no longer liable to pay the freeholder’s costs when exercising their right of collective enfranchisement. The presumption that the leaseholder pays the freeholder’s legal costs when challenging poor practice has been scrapped, strengthening the leaseholder’s new position under the improved redress scheme.

The landlord’s legal costs will no longer be considered relevant costs and cannot be recovered through the service charge or any administration charge, unless an order has been granted by the court or tribunal to disapply these provisions and the costs recoverable to be found as relevant.

When will the changes come into effect?

Some provisions of the Act have been given a date by which they will come into force.  For example, provisions 111 and 115 to 117, will come into force by 24 July 2024.

• Provision 111 amends some of the Law of Property Act 1925 and prohibits action being taken to recover arrears unless a notice has been served in a prescribed form and 30 days has expired.
• 115 to 117 will amend parts of the Building Safety Act 2022 (“BSA”), with 116 and 117 repealing Section125 of the BSA and making consequential amendments.

The next government’s Secretary of State will decide when the rest of the Act will be implemented. Secondary legislation to give effect to this Act is expected to be in place in 2025 to 2026.

Concerns with the Act

The proposed cap on ground rent has been omitted from the Act due to the rush to ensure it was passed before Parliament was dissolved. Despite previous indications that the limit would be set at £250, or even just a peppercorn rent (a minimal amount), this has not happened, despite the Government acknowledging in the consultation document that leaseholders have little control over these charges, and it has left some unable to “sell the property easily due to these charges”.

It is important to note the standard valuation method will continue to be used for ground rent, meaning any rent in excess of the prescribed amount of 0.1% of the freehold value is not to be taken into account.

It is now the responsibility of the freeholder to get an order in their favour that the costs are recoverable, rather than for the leaseholder to challenge such costs in the tribunal or the court. This could cause a vast number of new cases in the tribunal and court which are already overburdened.

Summary

The Act has tried to redress the balance between leaseholders and freeholders but has instead become much more favourable to leaseholders. Although it has succeeded in strengthening the rights of leaseholders, it has failed to introduce a cap on ground rent, a key issue for many leaseholders that was addressed in the Government’s consultation document. For the landlord, the major change and problem comes with the recoverability of legal costs, with which we will likely see a large increase in the number of proceedings being issued.

It is important to note that not all these provisions will be brought into effect in the coming months - some will still require further legislation to bring them into effect, for which we will need to wait for the new government to lay out its plan of implementation for the Act.

The Hamlins Real Estate Disputes team has expertise in both commercial and residential matters. We seek to obtain the best outcome possible for every client, no matter how big or small the issue may be. If you would like a conversation to find out how we might help you, please get in touch.