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The Leasehold and Freehold Reform Act 2024
The Leasehold and Freehold Reform Act 2024 (LAFRA) received Royal Assent on Friday 24th May 2024, as part of the pre-election procedure known as the “wash-up”. LAFRA brings some fundamental changes to leasehold valuation methodology and legal processes, with the intention of making it easier, cheaper, fairer and more transparent for leaseholders to extend their leases and buy the freehold of their building.
What is the “Wash-Up” Procedure?
The “wash-up” procedure refers to the final days of a parliamentary session before it dissolves in readiness for a general election. During this period, all of the “work in progress” is dealt with quickly … or chucked in the bin. On the leasehold side of life, the Leasehold and Freehold Reform Bill was expedited through its remaining legislative stages. It was fast-tracked … bi-passing its committee stage and potential substantial debates and amendments. And all because Rishi Sunak announced the snap Election taking place on 4th July 2024.
Why Change the Existing Leasehold Enfranchisement Laws?
Leasehold reform has been chugging along at a snail’s pace, since the Law Commission’s report in 2018. There have been numerous potential amendments discussed and debated at length.
Broadly, there has been widespread cross-party support for reform, since the King’s Speech last year. Thus the wash-up saw the Bill hurried along, rather than being binned.
The Leasehold and Freehold Reform Act 2024 (LAFRA) aims to substantially improve the rights of residential long leaseholders of houses and flats in England and Wales.
What Are the Key Provisions of the New Act?
There are a few provisions that do come into force on 24th July 2024 which concern remediation orders under the Building Safety Act and Notices concerning Rent Charge arrears. However, whilst King Charles has signed and the Act has become law, the majority of its provisions don’t come into effect until the dates specified by the Secretary of State - following the introduction of relevant secondary legislation; e.g. Statutory Instruments. Currently, there is no definitive timetable – because there are currently no MPs to manage the secondary legislation formalities.
The controversial proposal to cap ground rents at £250 per annum, or reduce them to zero, was scrapped as part of the wash-up procedure. Ground rent has therefore, for now at least, not been abolished. (The outcome of the consultation on capping ground rents, which closed back in January 2024, has not yet been announced – but should come to light after the election.)
Estate Management Charges
With regards variable estate rent charges Freeholders will be provided with similar protection to those enjoyed by residential leaseholders. Landlords and estate management companies who manage property or estates will also be required to sign up to a mandatory redress scheme.
Service Charges
There will be changes to service charges and amendments to the Landlord and Tenant Act 1985 including:
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A specified form for demands for payment.
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A specified form for Section 20B(2) commonly known as future demand notices.
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A specified form for Service Charge Accounts which must be provided within 6 months of year end.
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Annual Report which must be provided within one month of year end.
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Leaseholders will have the right to obtain information about their service charges on request.
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Leaseholders will have the right to enforce the above duties via an application to the First-tier Tribunal.
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A limitation will be placed on the recovery of insurance costs where those costs are ‘excluded costs’.
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An administration charge schedule payable by leaseholders must be published.
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Arguments over the ‘reasonableness’ of a landlord’s costs will become a thing of the past, as leaseholders will no longer have to pay for the lawyers acting for the freeholder (unless the landlord applies for (and successfully obtains) an order from the Court of Tribunal allowing the landlord to recover those costs).
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Sales Information request will need to be provided to the leaseholders and the amounts charged for this are expected to be limited.
990 Year Lease Extensions
Under the Leasehold and Freehold Reform Act 2024 (LAFRA), leaseholders can now extend their leases by an additional 990 years, with ground rent reduced to £zero (a ‘peppercorn’). This change offers long-term security for leaseholders and removes the need for repeated lease extensions (previously +90 years).
Leasehold Houses Banned
There are now only a very limited circumstances where a long lease for a house is permitted. Almost all new houses should therefore be freehold in future.
The Abolition of Marriage Value
Marriage value can add substantially to the premium paid for a lease extension – particularly where the remaining term is less than 80 years. Thus its abolition makes life cheaper for leaseholders – and detrimentally affects freeholders and landlords on the other side of such transactions.
Two Year Ownership No Longer Required
The need to own a lease for two years before you could force your landlord to give you a lease extension – has been abolished. The new provisions allow leaseholders to act immediately after they’ve purchased a flat.
This provision also removes the stress of purchasing ‘short leases’ with the benefit of section 42 notices signed by the selling leaseholder … and the legal pitfalls which went with those situations.
Reduced Residential Floor Area Requirements
Mixed-use buildings; e.g. ground floor shop with flats above … may now qualify for Right to Enfranchise or Right to Manage. The boundary has moved from a maximum of 25% commercial … to 50% … thus enabling a huge number of leaseholders to take control of the management of their building, when previously they did not qualify.
Non-Participating Flats
Collective enfranchisements cases (leaseholders buying the freehold) will no longer require ‘white knight investors’ to cover the cost of non-participating flats. In future, the leaseholders won’t have to buy those areas of the building – the landlord will retain them, via a new lease. This reduces costs for leaseholders AND makes the process easier.
Valuation Methodology
A rather technical subject as far as leaseholders are concerned – but in future the Secretary of State will dictate ‘deferment’ and ‘capitalisation’ rates. However, we don’t yet know when or how these rates will be set – nor how regularly they will be revised (indications were “every 5 to 10 years”).
It is likely these rates will be set via secondary legislation – which won’t be drafted until after the General Election and subsequent ministerial appointments.
Does the New Law Create Any Problems?
The abolition of marriage value will reduce the price paid by leaseholders to extend their ‘short leases’. However, prescribing deferment and capitalisation rates may increase costs for leaseholders, as these are key components of the valuation calculations for premiums.
Current Uncertainty
It will take a good few months (at the very earliest), if not years, for secondary legislation to be drafted, agreed and enacted - to implement the main elements of LAFRA. Consequently, there is considerable uncertainty about when the new law will actually take effect in the real world. It could be 2025 or 2026 before we see any practical changes.
Most of the provisions will require Statutory Instruments – and their timetable will very much depend upon the next Government’s priorities.
If you have questions about the Leasehold and Freehold Reform Act 2024 and how it will impact your specific situation, please contact info@casserlypm.co.uk
Best wishes,
Paul
Paul Casserly
Casserly Property Management
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