Under the Conservative government, the Leasehold and Freehold Reform Act (the “Act”) became law on 24 May 2024. It reached Royal Assent under the Department of Levelling Up Houses & Communities. This Department’s name has now changed under the new Labour government and is now called the Ministry of Housing, Communities and Local Government.
The Act was pushed through parliament to “improve consumer choice and fairness in leasehold” and to “crackdown on unfair practices in leasehold”. Conservative Manifesto 2017.
It’s important to read Labour’s Manifesto 2024 too – please look at page 36 onwards on this topic of building and infrastructure).
The wording in quotes below is Parliament’s summary of what the Act’s key aims are, essentially helping people extend their leases on their properties for less money, and having more transparency and fairness for leaseholders.
“A bill to prohibit the grant or assignment of certain new long residential leases of houses, to amend the rights of tenants under long residential leases to acquire the freeholds of their houses, to extend the leases of their houses or flats, and to collectively enfranchise or manage the buildings containing their flats, to give such tenants the right to reduce the rent payable under their leases to a peppercorn, to regulate the relationship between residential landlords and tenants, to regulate residential estate management, to regulate rent charges and to amend the Building Safety Act 2022 in connection with the remediation of building defects and the insolvency of persons who have repairing obligations relating to certain kinds of buildings.“
UK Parliament
Under the Act, came immediate changes to the Building Safety Act 2022, which came into force on 24 July 2024.
Some of the key changes for service charges and property management include:
- A ban on new leasehold houses in England and Wales resulting in every sale to be sold on a freehold basis.
- There will be an increase in standard lease extension terms on both flats and houses from 90 to 990 years.
- Leaseholders can apply to extend their lease directly upon completion of the purchase of their home.
- Collective enfranchisement changes including rights of redress.
- The Act will implement a change for freeholders who manage any buildings directly to become a member of a redress scheme, similarly as to how managing agents are required to be.
As trusted advisers to property management and block management companies, we’ll start off with explaining changes to service charges including insurance.
SERVICES CHARGES, PROPERTY MANAGEMENT & INSURANCE
It’s worthwhile noting that homeowners for both private and mixed tenure estates will have full rights of redress, meaning they are entitled to receive more information about service charges. The Act stops the assumption that leaseholders ought to pay their freeholder’s costs if there is a dispute, and importantly, there is going to be a ban on any commission paid for arranging insurance by freeholders (or their managing agents).
Leaseholders are now allowed to appoint a managing agent of their choice, which will see more competition between management agents, having to sustain properties and clients through cost-effective building services.
If you are a block management company, it’s worthwhile keeping open communication with your landlord clients because their tenants/leaseholders could rally together and convince them (as their freeholder) to change companies if they don’t like the service they are getting.
To summarise the changes for service charges and insurance to enhance transparency to leaseholders under the Act:
- Any demands for service charges need to be in a standard form, which should include the statement of account & invoices.
- Freeholders and/or their block management company or property managing agents to offer regular updates, such as insurance details.
- It will be easier for leaseholders to challenge service charges they dee unreasonable. If they dispute unreasonable charges, then the “presumption” that they, as a leaseholder, must pay the legal costs will now be eliminated. These changes will be significant to how property managers and insurers collaborate.
- A ban on opaque and excessive buildings insurance commissions for freeholders and managing agents. There must be transparent and fair handling fees in place.
Other updates under the Act include changes to lease extensions, freeholder purchases, leasehold houses, mixed-use buildings, Section 125A and insolvency practitioners. Have a read below to find out a little more about each subject. If you still have questions and the answers are not here, you can email me directly (laura.severn@lmp-law.com or send a message through our CONTACT page HERE.)
Lease Extensions and Freehold Purchases
Leaseholders can now extend their leases by up to 990 years without having to have owned it for two years.
Marriage values have been scrapped, which makes it cheaper for leaseholders to extend their leases or buy the freehold. A marriage value was previously a term used for when an additional layer of compensation was owed to a freeholder when a leaseholder wanted to extend their lease when there were less than 80 years left on it.
Collective Enfranchisement
The Act has introduced some significant changes for leaseholders when it comes to collective enfranchisement.
There is now an increase to non-residential limits meaning more homeowners will have access to Right to Manage or the right to collective enfranchisement. Under the Act, leaseholders are still barred from collectively enfranchising a mixed-use building (with both residential and commercial spaces) but only if more than 50% of its floor area is commercial (e.g., shops or offices). It used to be 25% so this has increased considerably.
As mentioned above, the Act now makes it easier and cheaper for a leaseholder if they need to exercise their enfranchisement rights as they no longer have to the freeholder’s legal costs to pay.
Ban on New Leasehold Houses
The sale of new leasehold houses is now prohibited, except in exceptional circumstances. Future sales will be predominantly freehold.
Commonhold and Mixed-Use Buildings
Commonhold (a form of ownership or tenure for multi-occupancy development) is now encouraged as the default tenure for new flats. The limit for non-residential floor space in a mixed-use building that qualifies for Leasehold Enfranchisement or the Right to Manage has now increased from 25% to 50%.
Section 125A and Insolvency Practitioners
Section 119 of the Leaseholder and Freeholder Reform Act introduces Section 125A under the Building Safety Act. It’s complicated, but the team and I will guide and advise you all the way! Section 125A applies if an insolvency practitioner (IP) is selected as a “Responsible Person”.
If an IP is appointed because of a ‘Higher-Risk Building’ or a ‘Relevant Building’ matter, they have to notify the local regulator.
Higher-Risk Buildings are residential buildings in England that are at least 18 metres in height or has at least 7 storeys; contain at least 2 residential units.
Relevant Buildings are self-contained buildings or self-contained parts of a building in England that are at least 11 metres high or have at least 5 storeys; and contain at least 2 dwellings.
The newly appointed IP has to provide ‘relevant information’ to:
- the local authority for the area in which the building is located,
- the fire and rescue authority for that area, and
- the Building Safety Regulator (in the case of a Higher Risk Building).
On 24 July 2024 further amendments to the Act became effective, addressing insurance commissions and further protections. These are:
The Building Safety Act in England has undergone amendments through the Leasehold and Freehold Reform Act 2024. These changes, effective since 24 July 2024, address insurance commissions and provide additional protections:
Cost of Litigation
Leaseholders who run Right to Manage (RTM)/Resident Management (RMC) companies, managing their own buildings, can now apply for a Remediation Contribution Order, which allows them to split the cost with a wider group of leaseholders. The lease must permit this however, but if permitted, then those costs can be passed onto them via the service charges.
This exemption is limited however, and will allow freeholders to pass on legal costs. (If not and RTM / RMCH then the Building Safety Act now protects qualifying leaseholders from the presumption that freeholders will pass on litigation costs.)
Repeal of Section 125
A new resolution to a conflict between insolvency law and Section 125 of the Building Safety Act is now in place with Section 118 of the Leasehold and Freehold Reform Act 2024.
What would have happened previously is that any monies recovered through the courts for remediation costs would have gone to creditors first. Now s118 ensures those funds are used for remediation costs rather than to pay creditors off first.
Property law and the evolving legislation amendments, together with a new government mean that LMP Law will keep you updated. However, if you would like to speak to me or one of my specialist colleagues, please do get in touch, we’d love to hear from you.
Ending this article, it may have been a surprise to note that there were no proposals in the Act to cap Ground Rent.
Please also remember that not all the amendments will have come into effect yet. Check with us if you have any queries in this regard.
Laura.
