The hasty pre-general election introduction in the final parliamentary session has led to major legislative casualties
When it was announced that a UK general election would take place on 4 July, there was a two-day "wash up" period to pass draft legislation or drop it before Parliament was prorogued on 24 May (and subsequently dissolved on 30 May).
Tenant groups will be dismayed that some legislation, such as the Renters (Reform) Bill fell; however, the long-awaited Leasehold and Freehold Reform Bill just made it onto the statute books as the very last bill passed in the parliamentary session. The legislation is intended to provide greater rights and protections to long-leasehold homeowners in England and Wales, including rights to manage, enfranchisement, lease extensions and freehold estate management.
The journey to leasehold reform has certainly begun, but, as a result of rushed cross-party efforts to get it into law, the Leasehold and Freehold Reform Act is as notable for its omissions as its content. One of the most controversial deletions was the proposal to abolish or cap ground rents for existing leaseholders. Nevertheless, this omission (and others) may only be fleeting, whoever forms the next government: Labour has been vocal about its intention to resurrect the casualties from the hurried legislation and achieve a more fundamental reform to leasehold.
While the act received royal assent on 24 May 2024, so is now law, most of its provisions are not yet in effect and so are not in force.
Main provisions
The Leasehold and Freehold Reform Act has introduced a ban on the sale of new leasehold houses, although leasehold tenure remains for flats. There are also some exceptions to the ban, such as retirement housing or shared ownership leases.
The standard lease extension term has been increased to 990 years (from 50 years for houses and 90 years for flats), along with restrictions on cost recovery by landlords from leaseholders. This should reduce the expense and administrative burden for leaseholders of future lease extensions.
The requirement has been removed for a leaseholder to own a property for two years before being eligible to request a lease extension or to buy the freehold of a house.
Service charge transparency for residential leaseholders has been improved, with a requirement for managing agents or freeholders to issue demands in a standardised format.
Barriers have been removed for leaseholders to challenge landlords' unreasonable charges at the property tribunal. This is achieved by granting tenants enhanced rights to claim litigation costs from landlords (and restricting a landlord's ability to recover their litigation costs) as well as creating a new right to claim damages through the tribunal when a leaseholder considers that "excluded" insurance costs have been charged. Detail on the latter has yet to be provided in secondary legislation but is likely to aim to include what the government described as "opaque and excessive" insurance commissions.
Increases in the non-residential enfranchisement limit will means that residential leaseholders can gain the right to buy the freehold or manage the building where 50% of the internal floorspace is commercial (up from 25%).
Premiums have also been reduced for the extension of leases that have less than 80 years left to run, principally through the abolition of "marriage value".
Two of the most contentious points in the act are the change to the mixed-use exemption on collective enfranchisement claims and the abolition of marriage value.
Mixed-use exemption on collective enfranchisement claims
Residential tenants currently only have the right to acquire the freehold where less than 25% of the floorspace is used for non-residential purposes. The act substantially increases the limit to 50%.
Mixed-use schemes are frequently designed to keep the residential limit below the threshold, but, with the increase, many landlords will be concerned to find that their properties now fall within the scope of a potential collective enfranchisement claim.
Together with the new mandatory tenant right to require leasebacks to the former freeholder of premises that are not let to participating tenants, the revised threshold opens up the possibility of landlords' interest in the parts of the premises being replaced by a 999-year lease. Landlords will want to check their portfolios to see if their properties fall within any of the exceptions.
Moving forward, mixed-use schemes may start to target a higher proportion of non-residential units, with adverse effects for the critical issue of housing supply. In addition, further regulation may be required to ensure effective management of mixed-use estates by residential tenants.
Abolition of 'marriage value'
The abolition of "marriage value" to the premium payable for lease extensions with a remaining term of 80 years or less could also have a worrying impact for landlords. Marriage value is the increase in the value of the property following completion of the lease extension and reflects the additional market value of the longer lease and the loss of interest to the freeholder.
With its removal from the premium calculation, landlords have seen an effective transfer of the value in their freeholders – value that has been regarded as a legitimate property interest – to leaseholders. This could mean litigation for potential breach of human rights.
When will the act take effect?
While the act is now law, the majority of its operative provisions do not come into force until its commencement. For most provisions, this will require statutory instruments setting out further detail to be brought forward by the secretary of state.
Baroness Scott of the Department for Levelling up, Housing and Communities, in a "will write" ministerial letter in April, commented: "We are determined to facilitate a smooth transition to the system so that leaseholders, freeholders, landlords, agents and others involved in the leasehold market can adjust to and understand the new rules." She went on to say that the secondary legislation still needs to be drafted and so commencement is likely to be between 2025 and 2026. However this timeline remains uncertain and depends on whether this legislation is a priority for the next government.
Ground rent reform
The flagship but controversial proposal to abolish or cap ground rents for existing leaseholders failed to make it into law.
Following the abolition of ground rents for new leases in 2022, various options for reforms to ground rents in existing leases were being considered. In a consultation that closed in January 2024, the government asked for input on whether to freeze ground rents at current levels or to cap them at a peppercorn, at £250 or at the original sum at the time the lease was granted. The expectation was that once the outcome to the consultation was published, it would be introduced into the bill at a later stage, but this was simply not possible in the two day "wash-up period".
While tenants will be disappointed and landlords and investors will be relieved at the omission, this could be short-lived if the Labour Party form the next government. Labour's stated intention is to reintroduce legislation to address ground rents at the earliest opportunity.
Further leasehold reform
Forfeiture in the context of residential leases is likely to be revisited by a new government. The potential to lose one's home and a highly valuable asset for what may be a relatively minor breach of the lease's terms was widely recognised as a disproportionate remedy (even if often only used as a threat) and there was cross-party support for its abolition. However it fell into the "too difficult" pile given time constraints on the basis that simply abolishing forfeiture without a substitution would leave no suitable recourse for those who fail to pay their service charges or other breaches of lease.
A neat way to deal with the forfeiture issue is to replace the leasehold tenure altogether. In its 2020 report, "Reinvigorating commonhold: the alternative to leasehold ownership", the Law Commission set out a detailed proposal for a transition to commonhold, including options for converting current leaseholds to the new form of tenure.
Commonhold was introduced in 2004 to allow the freehold ownership of flats and avoid the shortcomings of leasehold. However, between 2004 and the 2020 report, there were "fewer than 20 commonhold developments" despite it being successful in many other countries. Labour initially pledged to ban the "feudal" leasehold tenure within 100 days of taking office, but has since rowed back on the timing of this pledge. As commonhold tenure is a relatively unknown concept, its introduction will take time and input from key stakeholders, but a Labour government would be likely to consult on the fundamental reform of leasehold and push forward the Law Commission's proposals.
Osborne Clarke comment
While many may be relieved that all the work towards the Leasehold and Freehold Reform Act was not wasted, its hasty introduction has meant that we have ended up with legislation that makes significant changes to the relationship between freeholder and leaseholder with inadequate scrutiny of the effect of the provisions. This is reflected in some of the speeches in the final Lords debate that described it as "sub-optimal" and "half-baked and half-thought out".
Another comment that the legislation is "far, far short of what was promised" anticipates the further reform and detail that will need to be brought forward to make true leasehold and freehold reform a reality. In the meantime, both industry and leaseholders are left in a state of undesirable uncertainty.
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