The Leasehold and Freehold Reform Act 2024 (the Act) received Royal Assent in May 2024. The purpose of the Act is to 'level the playing field' for leaseholders, making it easier and cheaper to extend their leases or to collectively purchase the freehold of their building and to reform what are widely seen as outdated ground rent regimes.
Key points for UK residential property investors
- The Act will make it cheaper to extend the lease of a property by removing the need to pay marriage value (the difference in the value of the lease before and after the lease extension) to the landlord. In most cases, the tenant will also no longer be responsible for a landlord's legal or surveyor costs.
- The Act also removes the qualification period of two years of ownership before leaseholders are able to extend a lease. Instead, they will now be able to extend leases immediately upon purchase of a property.
- The length of the extended lease will be increased, from an extended lease term of 50 years for houses and 90 years for flats, to a 990-year term for both.
- The Act should increase the number of blocks of flats which are able to purchase the freehold of their building by raising the proportion of commercial property allowed in a building to 50% (up from 25%).
- There will also be codes of practice introduced (similar to those followed by managing agents) for estate agents, and there will be new rules around what additional administrative costs can be recharged to tenants through service charges.
Sounds… good?
Yes. But whilst the Act is now on the statute books, the main elements of it are yet to come into force and will require secondary legislation before they become law.
The government has announced it will remove the two-year ownership requirement to qualify for statutory lease extensions and for buying the freehold of a leasehold house this month. But it seems likely that the other anticipated elements of the reforms will not come into play for some time – not least because there are a number of challenges from large landowners which will have to be considered first. This major resistance from many landlords (particularly a number of Central London estates) to the reforms means that challenges have been raised under the Human Rights Act.
Additionally, the new legislation doesn't address a number of key issues such as simplifying valuation calculations and providing clarity on the reinvention of commonhold.
The new codes of practice and ethics for estate agents will also take time to be drafted and agreed across the professions, and training will need to be provided where necessary.
Whilst increasing the percentage of commercial floorspace allowed in an enfranchisement will open the statutory right to more people in theory, the residential tenants may need to purchase the commercial elements from their landlord. This is likely to be a pricey process leaving them with a potential management issue around the use of the commercial space.
Despite the above issues, the passing of the legislation does seem to have led to more lease extension claims being brought, possibly by those who can't afford to wait for further legislation due to short lease lengths. Most people seem to feel that whilst the reforms are a good start, there needs to be further consideration of the legislation before they are fit for purpose to reform the sector as hoped.
