Royal Assent for The Leasehold and Freehold Reform Act

The Leasehold and Freehold Reform Act 2024 (the Act) received Royal Assent on 24 May 2024. The Government's press release stated that "The Act will make it easier and cheaper for leaseholders to buy their freehold, increase standard lease extension terms to 990 years for houses and flats, and provide greater transparency over service charges." 

There have already been many changes in the construction industry with the implementation of the BSA 2022 and secondary legislation, and an increased focus on consumer rights with the new consumer duty that businesses need to get to grips with. This act is no exception to the drive for consumer rights.  The Act is designed to make it easier for leaseholders to deal with their own properties and challenge behaviours by landlords and their agents that they consider to be unreasonable. This is more legislation about which property managers need to be aware and understand what it means for their own businesses and their obligations to their clients. 

The Act extends the standard lease extension term from 90 years to 990 years for both flats and houses and reduces ground rents to a peppercorn.  It also removes the requirement for leaseholders to have owned their property for two years before they can seek to enfranchise or extend their lease.

RICS has issued its response and has confirmed that it "welcomes" this Act, and believes it will "provide clarity to leaseholders, landlords and the market".  RICS has also stated it will be paramount for a focus to be placed on regulation in the profession to ensure standards are upheld and consumers are protected. 

What are the likely key impacts?

The Act gives leaseholders the rights to take over the management of their property and/or to appoint their own property manager. Previously, if 25% of a building's floor space comprised commercial property, a leaseholder would be barred from taking over the management of that property. This limit has now been increased to 50%, thereby increasing the number of leaseholders that are able to take over their property management or appoint their own managing agent. 

This is likely to increase the number of leaseholders deciding to manage their own properties.  For existing property managers, this could result in a change of management and/or an increase in the number of parties dealing with properties, thereby increasing costs. 

For those leaseholders wanting to enfranchise, they will no longer have to wait two years from the date of purchase to take this step (or to extend their lease).  The Act also requires each party to pay their own costs of any enfranchisement, changing the position that it was always the leaseholder who had to pay the freeholder's costs. Property managers need to factor in this change and to advise freeholders about the impact of a request to enfranchise.  

The Act also introduces new requirements for freeholders and property managers to give greater transparency regarding service charges.  All leaseholders are now entitled to receive minimum key financial and non-financial information and freeholders/their agents must provide a standardised service charge demand form and an annual report, so that leaseholders can better scrutinise costs and challenge them, if appropriate. Allied to this, there will no longer be a presumption that leaseholders will pay the freeholder's legal fees in disputes where the leaseholders challenge practices or charges. This will need to be factored into any dealings with leaseholders where charges are subject to a challenge.

The Act also bans managing agents from taking a commission on arranging buildings insurance, imposing a new scheme of transparent administration fees.  Property managers will need to ensure they have appropriate costing structures in place for undertaking the task of arranging or renewing insurance.

Key points to note

• Transparency is key – leaseholders need to be made aware of all charges and costs, in a standard format that can be scrutinised. 
• Excessive costs will likely be challenged – make sure your practices and charges can be justified in the event of a challenge.
• Keep up to date – be aware of what new regulations will mean for your business and operational costs and stay up to date with future developments. 
• Take legal advice – if you are unsure of your obligations, seek legal advice to make sure you are compliant.

For further information on any of the issues raised in this article, please contact Alex Anderson.