Leasehold Reform Update – The Leasehold and Freehold Reform Act 2024
Key reforms being introduced by the Leasehold and Freehold Reform Act 2024 will see the most significant changes to the leasehold sector for over a decade.
Following a last-minute rush through the House of Lords before the dissolution of Parliament last month, the Leasehold and Freehold Reform Act 2024 became law on 24 May 2024. The Act contains many significant reforms to the leasehold sector, but one major change is the ban of leasehold houses. This has been widely publicised and debated, but what is surprising is the level of detail in the Act regarding when a lease may be used and the steps that the parties must take when they propose to enter into such a lease.
Permitted leases
Part 1 of the Act provides that a person may not grant or enter into an agreement to grant a long residential lease of a house after Section 1 of the Act comes into force. However, there is an exception to this rule and a landlord can grant a lease if it falls within one of the categories set out in Schedule 1 of the Act – these are known as “permitted leases.”
The types of permitted leases are split into two sub-categories; those for which Tribunal certification is needed (Schedule 1, Part 1) and those for which self-certification is required (Schedule 1, Part 2).
All marketing material relating to the house must contain or be accompanied by certain information which is referred to in the Act as the ‘permitted lease information’ which differs depending on whether the permitted lease is within Part 1 or Part or both Parts. All permitted leases or agreements for such will need to be preceded by transaction warning notices.
If a long lease is granted in breach of Section 1, the tenant would have the right to acquire the freehold estate and any intermediate interest in the relevant land, for no consideration.
Enforcement of leasehold house restrictions will be carried out by local weights and measures authorities who be able to impose financial penalties.
Lease extensions
Part 2 of the Act also brought in a number of changes to leasehold enfranchisement with the aim of making it easier and cheaper for leaseholders to extend their leases or acquire the freehold of their building. These changes will come into force following the introduction of secondary legislation for which there is not currently a definitive timeframe.
Whilst much of the detail is still to be provided by secondary legislation, we know that statutory lease extensions for flats and houses will be for a term of 990 years, plus the unexpired term of the previous lease (rather than 90 years for flats and 50 years for houses).
Statutory lease extensions for houses will be at a peppercorn rent, subject to payment of a premium, and the two-year ownership condition for statutory lease extension claims is abolished.
Tenants will no longer have to wait 12 months before bringing a fresh collective enfranchisement or lease extension claim following the withdrawal or deemed withdrawal of a claim notice.
Tenants under shared ownership leases which have not staircased to 100% have the right to lease extensions of houses and flats, however shared ownership leaseholders will not be qualifying tenants for collective enfranchisement claims – in those cases the landlord will be required to take a mandatory leaseback of the shared ownership unit.
There are new exceptions for certified community housing providers (i.e. a community land trust within the meaning of s.2(7A) of the Leasehold Reform (Ground Rent) Act 2022 or as otherwise prescribed in regulations). Statutory lease extensions and freehold claims for houses will not be permitted if the landlord under the existing tenancy is a certified community housing provider, and a person cannot be a qualifying tenant of a flat for the purposes of a collective enfranchisement claim where the immediate landlord under the lease is a certified community housing provider.
Collective enfranchisement
In collective enfranchisement claims, leaseholders can require their landlord to take a leaseback of non-participating flats and landlords can no longer contest a claim to acquire the freehold of a leasehold house under the LRA 1967 on redevelopment grounds or if they will be a resident landlord or if the land is required for public purposes.
Also, in collective enfranchisement claims there is a new exception for public sector landlords. Intermediate interests cannot be acquired on collective enfranchisement where the intermediate lease demises residential property which is also demised by a public sector occupational tenancy, which means a secure tenancy, an introductory tenancy, a secure contract or an introductory standard contract.
The non-residential limit on collective enfranchisement claims is increased from 25 per cent to 50 per cent, so leaseholders in mixed use buildings with non-residential parts of up to 50 per cent rather than 25 per cent of the internal floor area of the premises (excluding common parts) will be eligible to exercise the right to acquire the freehold of their building.
Valuation method changes
Changes in valuation method mean it will be cheaper for tenants to extend their leases or acquire the freehold:
- marriage value (payable by leaseholders for leases under 80 years) is abolished;
- ground rent is assumed to be capped at 0.1 per cent of the market value of the premises when valuing the freeholder’s interest;
- capitalisation and deferment rates will be prescribed by secondary legislation.
Costs recovery by landlords will be limited to:
- where the claim fails for certain “permitted reasons”, including the landlord being certified as a community housing provider, compulsory acquisition, landlord’s redevelopment rights, landlord’s residential rights, land required for public purposes, property transferred for public benefit, application is made for an estate management scheme;
- where the tenant acquires the freehold or extended lease and the price payable is less than (a) an amount to be prescribed by secondary legislation/regulations, (b) the landlord’s costs are incurred other than in connection with court or tribunal proceedings, (c) the landlord’s costs are reasonable and (d) the costs are more than the price paid, in which case the landlord can recover the difference between the price paid by the tenant and the costs incurred by the landlord, or if those costs exceed a prescribed amount, that prescribed amount.
The First-tier Tribunal (Property Chamber) will have wider jurisdiction to determine matters previously only within the jurisdiction of the county court such as issues relating to entitlement to claim or to what property that right extends and new powers relating to completion where the completion or grant has not taken place because a party has failed to execute the conveyance or lease or failed to pay the price in accordance with the Act.
Leaseholders have the right to reduce their ground rent to a peppercorn, subject to payment of a premium.
What is not included
The proposed cap on ground rents did not make it into the Bill in time, due to the last-minute rush to get the Act onto the statute books before the dissolution of Parliament, so this will have to wait for further legislation under a future government
Finally, secondary legislation is needed to flesh out and give effect to these reforms. Current indications are that we will be waiting until 2025-26 for this to happen.
If you would like to discuss any leasehold issues, please request a free initial consultation with one of our experts, Gabrielle Roberts, Kary Withers or Lynn James.
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