Background
The Leasehold and Freehold Reform Act 2024 received royal assent in the wash up just prior to the election.
It included some of the changes around the rights of leaseholders of flats and houses to obtain extended leases and the freehold that The Law Commission had recommended, i.e. providing for leases to be extended by 990 rather than 90 years, doing away with the need to have owned for two years to qualify for an extended lease and bringing more buildings within the right to enfranchise or manage by increasing the threshold of non-residential parts from 25% to 50%.
Also present are changes to the basis of calculating the premium payable by leaseholders by adopting some of the valuation options set out by The Law Commission, i.e. scrapping marriage value and setting rates periodically to determine other elements of the premium payable.
None of these changes have come into force yet. For some, in practice, secondary legislation is required.
The Act omitted many of the recommendations made by the Law Commission around enfranchisement, it included only a few of those around the right to manage and none in respect of commonhold.
In the meantime a number of landlords have launched challenges to the legislation (the outcome of which may take years to see) and we have had a change of government.
There were concerns whether the new government would implement the Act and what it might do instead; it may have opted to leave it on the shelf and instead bring in more comprehensive legislation by way of the root and branch reform that the Law Commission had recommended to replace the existing legislation entirely, rather than amending it piecemeal as the Act does.
Some Leaseholders have held off making claims for years in the hope that the premium they must pay would reduce significantly.
The previous government had also consulted around capping ground rents in existing residential lease contracts.
So what can we expect next? Less, more or maybe no reform at all?
Government Statement
Matthew Pennycook, minister of state for housing and planning, has now confirmed that the government will implement the Act in full and that in time it plans to enact the remaining Law Commission recommendations in these areas.
It will also make retrospective changes to ground rents payable under existing lease contracts and change the rules around a landlord’s right to forfeit at lease.
The Act was criticised as making the process of “holistic incoherent reform more challenging” and being limited in nature so making it clear that the government intends to address this in time.
The government accepts that the Act includes a necessary set of reforms and confirms that the government's intention is to act as quickly as possible by implementing its various provisions.
However a small number of “specific but serious flaws” are said to have been identified that need to be rectified via primary legislation, including a loophole that takes the valuation changes further than intended and an omission that would deny shared ownership leaseholders the right to extend their lease with their direct landlord.
They are also concerned that the increase in the threshold to 50% for buildings containing non-residential parts might not operate as intended.
More consultation is planned in connection with commencing the remaining provisions of the Act via “an extensive program of detailed secondary legislation”.
Valuation changes will not be made quickly it seems as they say they need to fix the 'small number of specific but serious flaws in the Act' through primary legislation first – they plan to consult on rates (capitalization and deferment rates) in Summer of 2025 before Parliament then the approves secondary legislation around that and the flaws they have identified in the existing Act.
The two-year qualification rule is to go in January 2025, meaning that from then onwards flat buyers will no longer have to wait for two years before they can commence a lease extension claim; that said, where the lease is so short a mortgage can't be obtained then it will remain the case that the buyer has to wait for the seller to extend the lease before they can proceed.
The right to manage provisions are to commence in spring 2025 – this means they intend to pass the necessary secondary legislation to fix the problem they have identified with regard to expanding entitlement to buildings with up to 50% non-residential parts by then.
A consultation around buildings insurance remuneration such as commissions for landlords and agents is planned “very shortly”.
A consultation around the Act’s provision on service charges and shifting the onus on to landlords to have their costs approved before being able to pass them on to leaseholders is promised for 2025. So, the Act’s provisions in this regard may change.
Further legislation ‘The Commonhold And Freehold Reform Bill’ is promised which will:
- Implement the remainder of the Law Commission’s recommendations relating to leasehold enfranchisement and the right to manage.
- Reinvigorate commonhold through the introduction of comprehensive new legal framework – this will be their central focus which points to full implementation of the Law Commission’s recommendations subject to further consultation. They promise to “take decisive first steps to making commonhold the default tenure by the end of the Parliament”.Ban the sale of flats on a leasehold basis (they intend to consult around this).
- Change existing Ground rent obligations – they reiterate their commitment from the manifesto to “tackle unregulated and unaffordable ground rents”.
- Remove forfeiture from the landlord’s arsenal to ensure compliance by a leaseholder with their lease obligations.
- Reform the section 20 “major works” procedure.
- Strengthen the regulation of managing agents, which as a minimum, will include mandatory professional qualifications. Consultation around this is to occur in 2025. They will also consult then on options to reduce “the prevalence of private estate management arrangements”.
Conclusion
So, leaseholders with less than 80 years remaining of their lease who have been waiting for the valuation reforms to come into effect are unlikely to see this implemented before the end of 2025 by the time the consultation has run its course, the outcome has been considered, and legislation drafted and approved by parliament.
Leaseholders may also fear that even if the scrappage of marriage value is brought into force the consequent saving may be affected by where the other rates are set.
Those with longer leases may decide to wait for the costs changes to come into effect as this may save them a few thousand pounds however this will not benefit all leaseholders; the outcome of consultation as to a minimum protected level of premium is awaited - in those cases landlords will still be entitled to recover a contribution towards their costs.
Leaseholders already motivated to exercise the right to manage may wish to wait for the change to their cost regime to be brought into force but not for the other more distant prospect of reform unless they have to.
Removing forfeiture as a method of enforcing lease obligations may have the unintended side effect of making management and maintenance of blocks more difficult for leaseholders.
Mark Vinall, Partner, Ashley Wilson LLP
