Leasehold and Freehold Reform Act – how far does it go?

Other significant omissions from the new legislation include the removal or capping of existing ground rents and the end to forfeiture (the rules for ending long leases). Both were widely expected and hoped for.

Aside from the changes to the recovery of legal costs through the service charge, changes to rent charge arrears, and amendments to the Building Safety Act, which will all become law on 24 July 2024, the remainder of the act is expected to take effect in 2025-26.

The date for this is yet to be confirmed by the secretary of state. It is worth bearing in mind that just because the act has been passed, there is no guarantee that regulations will follow and there is no prescribed timeline either.

However, assuming the new act is brought into effect it will introduce a number of key changes, including:

• make it easier and cheaper for leaseholders to buy their freehold
• increase standard lease extension terms to 990 years for houses and flats
• provide greater transparency over service charges

Additionally, the act will ban the sale of new leasehold houses other than in exceptional circumstances and end excessive buildings insurance commissions for freeholders and managing agents.

It will also scrap the requirement for a new leaseholder to have owned their house or flat for two years before they can buy or extend their lease.

The act will also make it easier for leaseholders to challenge their landlords for making unreasonable charges by taking the dispute to a tribunal.

The new powers also grant freehold homeowners on private and mixed-tenure estates the same rights of redress as leaseholders, and equivalent rights to transparency over their estate charges.

Leaseholders will also receive help in taking over the management of their property if they decide to do so. 

Currently, leaseholders in some buildings are barred from taking over the management of the site or buying its freehold if more than 25 per cent of its floor space is commercial – such as shops or offices on the ground floor.

However, this limit will be increased to 50 per cent to enable more homeowners to access Right to Manage or the right to a collective enfranchisement.

What are the financial consequences?

For some leaseholders who are looking to extend existing leases or purchase the freeholds, the act will bring financial benefits. For example, those with a short lease (less than 80 years) or grounds rents above 0.1 per cent should find that the process is cheaper.

On the other hand, the process could end up being more expensive for leaseholders on a long lease or those with low ground rent. 

This is because the act doesn’t set out the deferment and capitalisation rates, which are required to determine lease extensions and freehold purchase prices.

These will be added at a later date. The fact that these rates have not been specified within the act means that landlords and leaseholders will be in limbo for some time, and leaseholders may have to make a judgement about whether it is better to extend their lease / purchase the freehold now or wait a while longer.

How does the act affect shared ownership properties?

The act gives shared owners the right to extend their leases. As at present, if the shared ownership lease is of a house, shared owners are not entitled to purchase the freehold nor, if the shared ownership lease is of a flat, the right to join in a claim for collective enfranchisement. This would all change. 

How does the act impact housing associations?

Tenants paying fixed service charges will have some rights of challenge. Currently, fixed service charges are used extensively in tenanted properties but they can only be challenged on the total of the amount paid to the landlord (service charge plus rent) and then only on the basis that the total sum is more than a “market rent”. 

Under the new legislation, tenants will benefit from new protections against excessive service charges under the Landlord and Tenant Act, covering fixed service charges. Landlords will also have to understand and comply with new rules related to service charge demands.

There is also likely to be a surge in lease extensions both for ‘full’ leases and shared ownership leases once the act has taken effect.

Jonathan Cox, partner, Anthony Collins