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Short introduction to the Leasehold and Freehold Reform Act 2024

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As part of the ‘wash up’ in the final Parliamentary session under the current Government, the Leasehold and Freehold Reform Act 2024 (LFRA) has officially become part of the Law of England and Wales with the conferral of Royal Assent on 24th May 2024. As stated in its introduction, the Act focuses on extending leaseholders’ rights and degree of control over their property and tenure, and regulating the relationship between different rights holders of the same property.

The LFRA is not yet in force. Section 123 states that the leasehold reforms will come into effect following secondary legislation. Therefore, at the moment we will need to watch this space as to when those provisions will come into effect. What we know is that some of the other provisions relating to charges and various amendments to the Building Safety Act 2022 will most likely come into force on 24 July 2024.

New houses will no longer be available for sale as long leases (i.e., longer than 21 years)[1], but only as freeholds.[2] Leaseholds sales of new homes will only be permitted in limited circumstances (were public sector institutions and specific situations such as shared ownership, financial planning and agricultural tenancies are involved).[3] While this is in line with the aim of eventually abolishing leaseholds for the general public,[4] there remains some uncertainty about the inclusion or exclusion of flats within in the definition of houses[5] - if the relevant provision is interpreted to exclude them, leaseholds will be part of the housing market (and the lives of its customers) for the foreseeable future.

It will no longer be necessary for leaseholders to have owned the property for at least two years before being able to buy/renew their lease.[6] This will be welcomed by homeowners for whom quicker or more timely financial planning is essential to address case-specific financial insecurities. However, the real benefit will need to be measured against the increasing uncertainty in job and life planning and its impact over individuals’ willingness - or ability - to participate in the housing market. The frequent moves and lifestyle changes that have become the norm in recent decades, which do not allow for long-term planning, may make long leases impractical and/or undesirable for a number of citizens.

The standard leasehold extension period has been increased from the current 50 years for houses and 90 years for flats to 990 years.[7] While the postponement of the extension dates[8] will be welcomed by some (given the benefits in terms of economic security for one’s own estate and for subsequent generations), planning of a property purchase will now need to take into account fluctuations in house prices and values and service charges (i.e., the sums a tenant can be expected to pay to meet or contribute to the landlord’s expenses for the general upkeep and management of the property)[9] over such a long period. The impact of these circumstances on the spending power and social mobility of individual households is not easily predict.

Other changes have been made to govern the leaseholder’s relationship with the property’s freeholder and other third parties involved. The allocation of legal costs has been revised to address the pre-existing imbalance of power between leaseholders and freeholders, exempting the former from being automatically burdened with the costs of enfranchisement and extension claims,[10] and litigation costs more generally.[11] Further provisions, presumably with the same aim, have also been made regarding the ability to recover legal costs from landlords.[12]

In addition, specific details have been set out in relation to the standardised forms of accounts and annual reports that freeholders and managing agents will be required to comply with[13] – ideally ensuring a basic level of transparency over service charges, and allowing them to be more easily understood and challenged by reducing legal preparation and completion times.

On a more practical note, it is now expected that freeholders who undertake property management duties will be enrolled in a redress scheme (alongside actual property managers) for the independent investigation of claims relating to their conduct in that capacity. Crucially, however, their agents (and simple tenants/leaseholders) who undertake on the same duties will not be subject to the same requirement.[14]

Tenure purchase and extension flexibility will be increased for part-commercial properties: leaseholders will now be able to purchase a freehold interest in a property where the percentage of non-residential/commercial reaches 50%, thereby widening access to Right to Manage schemes (i.e., the forced takeover of the services and management of the shared property by a group of leaseholders – with the power to appoint managing agents of their choice - to which the freeholder cannot object) by increasing the number of properties that are now eligible for purchase (the previous threshold limit sat at 25% commercial area over the entire property).[15] Collective Enfranchisement (i.e., the right for a group of leaseholders inhabiting the same building to purchase freeholding rights in the property collectively)[16] will also see its pre-existing restrictions on obtainment and re-enfranchisement eliminated.

In practice, the new legislation contains a number of proposals that will on the one hand help leaseholders and result in lower premiums, such as the removal of the marriage value for leases under 80 years and the capping of ground rents for the calculation of premiums. However, the position will remain uncertain until we have clearer information on the prescribed deferment and capitalisation rate, so we cannot say with certainty at this stage if premiums will be lower.

If you have a lease which is approaching 80 years, it would be wise to seek professional valuation advice on what the premium would be now compared to what it may be when the valuation provisions come into force. It is risky to wait without advice. If you have very long leases and are not concerned about the marriage value, it may be more risk to wait if the prescribed rates are lower and result in higher premiums. If you are approaching or already under 80 years, the new rules may benefit you as there will be no marriage value. Either way, it depends on your particular circumstances.

On the other hand, if you have already started the lease extension / collective enfranchisement process, you can simply continue and pay the premium and landlord’s costs based on the current legislation. Alternatively, you could withdraw from the process and see if there are any changes on the horizon. If you do decide to withdraw, you will have to pay the Landlord’s reasonable costs up to that point, which will definitely be higher than under the new rules.

There is a lot more to say on this subject and it is difficult to summarise all in one post. Of course, we are happy to talk to you if you need guidance (t:+44(0)20 3865 5437; and will keep you updated via our website and social media channels.

Disclaimer: These articles are for information purposes only and are not intended as legal advice. Professional advice should always be obtained before applying any information to particular circumstances.

Esclusione di responsabilità: questi articoli hanno uno scopo puramente informativo e non sono da intendersi come consulenza legale. Prima di applicare qualsiasi informazione a circostanze particolari, è necessario richiedere una consulenza professionale.

Avis de non-responsabilité : Ces articles sont fournis à titre d'information uniquement et ne constituent pas un avis juridique. Il convient toujours d'obtenir un avis professionnel avant d'appliquer toute information à des circonstances particulières.

Descargo de responsabilidad: Estos artículos tienen únicamente fines informativos y no pretenden ser un asesoramiento jurídico. Siempre debe obtenerse asesoramiento profesional antes de aplicar cualquier información a circunstancias particulares.