UPDATED 28 MAY 2024
New Rights For Leaseholders
The new Leasehold and Freehold Reform Act will benefit large numbers of leaseholders that may have felt they were being overlooked to some degree by previous laws. Here is a quick summary of the new Act:
- Leaseholders may now find it easier and cheaper to buy the freehold and extend the lease. (Yes, you still need a lease...even if you've bought the freehold.)
- Leaseholders will be able extend the lease on their flat or house to 990 years as standard (rather than 50 years for houses and 90 years for flats as previously).
- Leaseholders will no longer have to wait for two years of ownership before they can purchase the freehold or extend the lease.
- It should be much easier for leaseholders to challenge freeholders over unreasonable service charges.
- Sale of new leasehold houses will be banned in England and Wales (unless there are exceptional circumstances.)
- Excessive buildings insurance commission for freeholders and managing agents will be banned. These commissions will be replaced with fairer and more transparent handling fees.
- Freehold homeowners on private and mixed tenure estates will have the same rights of redress as leaseholders – and equivalent rights to transparency over charges.
- More leaseholders will be able to take over the management of their property if they wish. Leaseholders in some buildings had been barred from taking over the management of the site or buying its freehold if more than 25% of its floor space were commercial (such as shops or offices). But this limit will now be increased to 50% – giving more leaseholders access to the Right to Manage or the right to buy the freehold.
Now, let’s examine some of these changes in more detail…
Making It Cheaper And Quicker To Buy The Freehold Or Extend Your Lease
Leaseholders would pay less to “gain security over the future of their home,” declared the government when it first framed the new legislation. At the time, it stopped short of saying precisely how. And even after Royal Assent, questions still remain.
Traditionally, much of the cost of buying the freehold and extending the lease involved compensating the freeholder for the ‘marriage value’ if the lease had fallen below 80 years in length. (The marriage value was the uplift in the value of the property once the lease had been extended.)
However, when the House of Lords' amendments to the Bill were published, marriage values were to be abolished from the calculations in the previous legislation.
There are still questions to be asked about how the value of freeholds and lease extensions will be negotiated in light of the new Act. However, while the legal process for extending a residential lease is similar, leaseholders can hope to see reductions in the premiums to be paid.
In the meantime, freeholders are likely to be feeling aggrieved – as are leaseholders who had already bought the freehold and lease extension and have therefore missed out on potential savings.
Increasing The Standard Lease Extension From 90 Years To 990 Years
This is a smart move that will give leaseholders even more security over their valuable leasehold interest.
However, one could argue that the difference in value to a flat when extending the lease by 90 years or 990 years may be negligible, depending on the original lease term.
Removing The Two-Year Time Limit
Under the previous legislation, leaseholders had to own their flat for at least two years before they could extend their lease.
At best that was inconvenient, and at worst it could cost the leaseholders money – especially if the lease dropped below the previously crucial 80-year mark during this period.
Removing the two-year time limit is a positive for leaseholders. It is an important right, and will allow leaseholders to progress a lease extension as soon as they have purchased their flat.
Making Buildings Insurance Fairer
Leaseholders may not realise it but freeholders and managing agents often get commission when they procure buildings insurance for the block.
The amount of that commission – which can sometimes be quite high – can significantly benefit the freeholder.
So the new law will ban that commission and replace it with a more transparent handling fee. In principle, it will give the leaseholders greater oversight and hopefully prevent landlords and their agents from potentially exploiting the system.
Ground Rents On Leasehold Properties
Conspicuous by its absence from the Leasehold and Freehold Reform Act is a cap on ground rents on existing developments. This had been a key focus for campaigners.
Before the then Bill, the government had already brought in the Leasehold Reform (Ground Rent) Act 2022 to protect leaseholders from excessive ground rents on new flats – setting the ground rents to a peppercorn in such circumstances.
Campaigners wanted the new legislation to go a step further, capping ground rents on existing leases. This was met with disapproval from many freeholders for obvious reasons.
It remains to be seen whether new legislation will tackle this issue in future but we would expect to see more lobbying from campaigners during and/or after the 2024 election.
When Will The New Act Take Effect?
We await confirmation from Parliament as to the specific date upon which this legislation will be effective. This will be decided after the general election in July, once the new government is appointed and Parliament starts sitting again. It is hoped by many that the date of effect will be before the end of 2024.
Get Expert Legal Advice On Leasehold Property
Leasehold property law can be highly complex – especially with all the changes being suggested in the planned new legislation.
For expert legal advice, contact Coles Miller Partner Nick Leedham who specialises in residential leasehold property matters. He is based at our Bournemouth office.
