The Leasehold Reform Act

Essentially, all of the much talked about changes are there including the 990-year lease extension, abolition of the two-year rule and the change in qualification criteria for mixed use buildings.

In addition, we will see the end of marriage value for leases under 80 years and the end of the ability for the landlord to recover their costs from the tenant under a standard statutory claim. There are also changes that relate to property management.

The valuation changes will mean that most valuations will be on the ‘standard’ basis – effectively a term and reversion calculation with a presumed 0.1% cap on the ground rent when valuing the freeholder’s interest.

In addition, there is a ban on the creation of new leasehold houses.

Whilst a few parts of the 2024 Act came into force on 24^th July 2024, these are fairly ‘minor’ changes in the greater scheme of things and relate to:

• restrictions on pursuing rent charge arrears (such that now a demand statement must first be served in a prescribed format at least 30 days before taking any action)
• an amendment to the BSA to allow flat owner controlled freehold companies and RTM companies the right to recover costs under Schedule 8 of that Act (where otherwise ordinarily the landlord cannot recover costs under the service charge) in relation to the pursuit of a ‘relevant defect’
• the repeal of Section 125 of the BSA 2022 and its replacement with a new Section 125A dealing with the duties of an insolvency practitioner appointed in respect of a ‘responsible person’ (either an ‘accountable person’ for higher risk buildings or the owner or party responsible for the common parts of a ‘relevant building’)

As to the other ‘meatier’ parts of the Act, as far as leasehold reform is concerned, these are subject to commencement under Statutory Instruments (‘SI’s) – see section 123(3).

These SIs need to be made by the Secretary of State and we also know that in order to be effective the valuation changes will need various matters such as the relevant rates to be prescribed. These will need to be in place before these changes can be enacted.

It is hard to predict but the anticipated timescale is likely to be 2025-2026 because of the need to draft the secondary legislation needed to bring the changes into effect.

Anyone expecting an immediate change on the valuation side (or indeed elsewhere) may well have to wait a little while.

What is not in force? And when will these provisions become law?

The remaining sweeping changes that the Act promises are not yet in force. A short summary of these appears below:

The 2024 Act makes big changes to the law on valuation as it relates to leasehold reform calculations (removing marriage value for leases under 80 years) and ‘capping’ for calculation purposes the value of any ground rent paid at 0.1% of the capital value of the property.

There are also the more functional changes in the enfranchisement space, such as changing the basis of statutory lease extensions to 990 years and allowing successive claims without any wait where a claim is withdrawn. The 2024 Act will also remove the two-year wait to qualify for a lease extension.  In addition, the Act will remove the ability of landlords to recover their costs in statutory claims. It also bans the creation of new leasehold houses and places restrictions on transfers out of leasehold land that might otherwise create these. There is also a new right for long leaseholders to buy out their ground rent.

In the field of property management, the 2024 Act also makes some big shifts by dealing with the following areas:

• Service charge and ground rent demands will need to be in a ‘universal’ prescribed format.
• Insurance commission will not be recoverable through the service charge, although the cost of the actions taken to place or arrange cover will be permitted.
• Regulations will cover the prompt provision of information in relation to sales information requests.
• Estate management charges payable in respect of freehold estates will be brought within the scope of the service charge legislation.
• There will be restrictions on the enforcement of rentcharges (a type of payment similar to ground rent that some freehold land is subject to).
• Amendments to the BSA 2022 to expand the definition of a ‘relevant defect’ to change this so that the cost of taking ‘relevant steps’ is included in the costs that may be restricted in recovery from a ‘qualifying lease’

Is it law?
Yes, it most certainly is. The 2024 Act received the Royal Assent right at the end of the final session of this Parliament and appeared right at the very end of the list of Acts approved in the ‘wash up’ at the end of this session of parliament.

Is it in Force?
No, not yet. The operative provisions do not come into force until commencement. The version of the Bill that has been passed into law is the version subject to the 67 Government amendments made in the Lords which were passed in the expedited legislative process on Friday 24^th May 2024. These amendments do not make significant changes to the general position under the Act but do tidy up some anomalies.

I have claim ongoing at the moment – should I just withdraw it as it might be about to get a lot cheaper?

Whenever there have been dramatic price adjustments in the past – such as in 2007/ 2008 – many leaseholders have considered withdrawing existing claims to extend their lease or purchase the freehold.

In many of those cases the cost/benefit analysis did not support withdrawing. In ongoing cases, if the premium being paid is not that significant relative to the value of the flat and given that a significant proportion of the likely costs will be incurred in any event, withdrawing and starting again does not often equate to better value.

However, with one of these proposed reforms there is possible change to a significant part of the calculation – marriage value – often this can be around 20-30% of the premium.

But it is just that: a fraction of the overall cost, and if this is your situation you should seek to understand the actual likely amount and consider this with all other relevant costs – including for instance finance or other ongoing costs – if the current lease length prevents sale or re-mortgage.

The reforms also promise to remove the landlord’s costs from the equation. In general, these are not likely to be that significant in the overall context of the claim itself but may be another reason to wait before initiating a claim.

Whilst we do know what the Act will contain, what we do not currently have is clarity as to when these enfranchisement provisions will come into force.

Each case will be fact specific, and you will need to consider your own position.

If you are about to issue a claim then perhaps consider that, as with any significant legislative change, leasehold reform timescales are quite ‘long.’

The length of a typical claim is around 10- 12 months from beginning to end, and in a case of any complexity, more like 18 months and in some cases quite possibly more.

Applying to the tribunal – after say 4-5 months of negotiation – will add at least another 2-3 months to any claim.  There is also a 4-month window to complete at the end of any claim and with the right advice this can sometimes be extended.

Therefore, it would be perfectly possible to start a claim now and then (if and when) the scope and timing of any changes become clearer, to use this a leverage to negotiate – and /or to take advantage of these changes as and when they come in.

This could provide a tactical route to managing any current or anticipated claims. Clearly those advising will need to be suitably adept and experienced in this area.

For leaseholders who are looking to sell their property imminently, the one point of certainty is that if a property is currently un-mortgageable or unsaleable because of lease length or other issues (such as an onerous ground rent), then the only course of action that will remedy this is to take action and extend your lease under the existing legislation.

For leases that are nearing the 80-year mark, or have already fallen below, the question of timing depends on the owner’s precise circumstances and immediate priorities. Whilst many will still need to act now, others may wish to hold off pending the future legislative changes being brought into effect.

Those who wait will need to balance the risk caused by any delay in doing so. With the 2024 Act now on the statute books the question of commencement looms larger.

You can keep up to date with our commentary on leasehold reform via our news pages here.

Leaseholders also have the option of pursuing a Right to Manage claim under existing legislation. The Right to Manage (RTM) is a statutory no-fault right introduced by the Commonhold and Leasehold Reform Act 2002 and provides a useful alternative to buying the freehold as there is no capital outlay (other than costs).

If you are considering buying your freehold but want to wait until the valuation changes come in, then the Right to Manage may be something to consider now. This would allow the leaseholders to take back control over costs and service charges in the interim.

There is currently no clear timeframe in place for this new reforming legislation to be active – albeit that the Act is now on the statute books. So, there is no clear idea of when the valuation or other changes may become law. It could be that these will not be in place before 2025/6 because of the need to draft secondary legislation. In addition, with an election and the prospect of a new administration it is not entirely clear what, if any, further reforms may be coming down the line.

Well, we know what the new Act provides. What we don’t know is the detail of how for instance some of the critical rates such as the deferment rate or capitalisation rate will be arrived at. These are to be prescribed by the Secretary of State and reviewed every 10 years (according to Paras 26 of Schedule 4 and 38 of Schedule 5). This will be critical to determining value in the ‘new world.’

We will need to see the secondary legislation to see how these will be determined. Government correspondence that we have seen relating to this by way of a parliamentary written answer in the Lords, taken at face value indicates a ‘determination to facilitate a smooth transition.’ That could mean that some of this could take some time.