Leasehold and Freehold Reform Act 2024 (“the LFRA”)
Leasehold and Freehold Reform Act 2024 (“the LFRA”)
The LFRA was passed and obtained Royal Assent on 24th May 2024 as the last piece of legislation passed in the wash-up before parliament was prorogued. The premise of the LFRA is to provide Leaseholders with more rights and protections and to make extending their lease or buying their freehold easier and cheaper.
What are the important changes for statutory lease extensions and collective enfranchisement?
The LFRA makes several changes to the existing processes, the main changes are:
Increasing the term of a statutory lease extension from 90 years for a flat and 50 years for a house to 990 years for both.
When exercising the right to extend their lease, a Leaseholder will not have to have owned their home for 2 years prior to requesting a lease extension. The amendment will allow a seller to transfer the property without having to assign the benefit of the Notice to the buyer.
The existing legislation (“LRHUDA 1993”) prohibits Leaseholders in a mixed use building with a commercial element of a floor area of over 25% from bringing a collective enfranchisement claim. The LFRA increases this to 50% of the floor area The aim is to allow more Leaseholders to collectively enfranchise their building.
Marriage value (for leases with a term of less than 80 years) will no longer be split with the Landlord. The LFRA effectively abolishes marriage value by removing the requirement for this to be paid to Landlords. The valuation will effectively be a term and reversion calculation only with a presumed 0.1% cap on ground rent. The deferment rate has not been determined. It is suggested it will be based on “market rent”. The rate to be determined will have a significant affect on the premiums to be paid. It has been suggested that the Government’s aim, may be to try to redress the loss of premium from the abolition of marriage value by reducing the deferment rate.
Landlords will no longer be able to recover their legal and valuation costs from the Leaseholders, except in low value claims or where a claim ceases to have effect for a “permitted reason”. Even where costs are recoverable, they will only be for “a prescribed amount” which will be set in secondary legislation.
Leaseholders pursuing a collective enfranchisement claim will be able to compel their Landlord to take a leaseback of any unit that is not owned by a participating tenant (including commercial units). Any leaseback will be for 999 years at a peppercorn rent. This is beneficial for Leaseholders as the value of the unit to be leased back will be removed from the premium payable for the freehold.
The cap on ground rent to £250 or to zero was not included in the final bill. It is not clear when or whether this will happen.
What changes have been made to the Right to Manage (RTM) procedure?
Under the existing rules, Leaseholders cannot acquire the RTM if more than 25% of the floorspace of the building is commercial. The LFRA has increased this to 50% allowing more Leaseholders to qualify for RTM.
As a general rule, RTM companies and the Leasehold members will not be responsible for the Landlord’s costs during an RTM claim. However, the Tribunal will be able to make an order for the RTM company to pay the Landlord’s costs.
When does the LFRA come into force?
It is not clear on what date the LFRA will commence. It is likely that the secondary legislation will need to be prepared and passed into law before the LFRA will be implemented to ensure that the provisions of the LFRA are workable. The Impact Assessment for the Bill, states “we have assumed that the majority of the reforms will commence in 2025/26. However, our redress reform may not be operational until 2028, due to the need to implement the necessary secondary legislation”.
Are there any other changes that I should be aware of?
The LFRA bans the sale of new leasehold houses other than in limited exceptional circumstances.
The LFRA provides Leaseholders with a lease of more than 150 years with the option to “buy out” the ground rent by paying the Landlord a premium in return for a peppercorn ground rent going forwards. This enables Leaseholders with already long leases to reduce their ground rent without pursuing a lease extension.
What’s next?
A number of important provisions in the LFRA require secondary legislation to be introduced for example, Capitalisation and Deferment rates will be set by secondary legislation as well the “prescribed amount” of Landlord’s fees. We do not know when this secondary legislation will be dealt with, but we imagine that the next Government will address this quickly to make the LFRA workable.
Labour have pledged to carry out further Leasehold Reform which will include enacting the Law Commission’s recommendations and promoting Commonhold. The Conservatives highlighted that they would have liked to have made further amendments to the Bill to deal with for example, capping ground rent at £250 per annum or reducing it to zero and banning forfeiture. Therefore, we expect the secondary legislation will be high on both parties’ agendas.
Whilst the LFRA will be a welcome change for many Leaseholders, it has been criticised for its hasty implementation. During the lifetime of the Bill, numerous amendments were requested, and several issues highlighted. Many practitioners (and members of the Commons and Lords) believe that the LFRA will be litigated over for years to come as errors and omissions are discovered. A challenge by Landlords is expected on human rights grounds and the Government may wait for the legal challenges to be settled before the Act can come into force.
The LFRA also contains a number of provisions relating to Service Charges and estate management fees. Our property litigation colleagues are preparing a note on this which will be circulated shortly.
