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Permission to Visit - Goldilocks and the Three Bank Statements
Robert Houchill
The Leasehold and Freehold Reform Act (“the Act”) became law on 24 May 2024. The Act aims to enhance the rights and benefits for homeowners in England. There is, however, debate as to potency of the Act given the absence of the proposed ground rent cap (which had been discussed for some time) and the failure to ban forfeiture of long residential leases.
Under the Act leaseholders are able to purchase their freehold more easily; amongst other provisions, the standard lease extension term will be greatly increased and the mechanism for leaseholders to challenge unreasonable charges at the First Tier Tribunal will be made cheaper and more streamlined.
The Act also contains elements amending the Building Safety Act 2022; these will come into force on 24 July 2024 whilst the remainder of the Act will need to be brought into force by statutory instrument by the next government, currently anticipated in 2025/2026.
The Act heralds significant changes for both landlords and tenants, creating new obligations for freeholders, landlords and managing agents in certain circumstances.
Key points of the Act:
Lease extensions and enfranchisement
- Right for tenants to acquire their freehold; it will now be cheaper and easier for tenants to acquire a share of their freehold; and they will not need to pay their freeholder’s costs when making an enfranchisement claim.
- The sale of new houses on a leasehold basis will be banned in England and Wales (save for in very specific circumstances); meaning all new houses sold will be on a freehold basis.
- Standard lease extension terms will now increase to 990 years for both houses and flats (having previously been 50 years for houses and 90 years for flats).
- The new legislation will mean that ‘marriage value’ will not be split with a freeholder. Marriage value is the hypothetical profit resulting from the extension of a short lease (being one with less than 80 years remaining). However, deferment and capitalisation rates still need to be set (and will be prescribed when the Act is brought into force). The deferment rate is the figure used to calculate how much compensation a tenant pays to their landlord when extending the term of their lease. It is a crucial element in calculating the premium an owner must pay to extend their lease (or to secure a share of the freehold) and ultimately any change in the rate could be more costly for those with more than 80 years left to run on their leases where they are seeking to extend.
- It will no longer be necessary to own a property for 2 years (as was required under the Leasehold Reform Act 1967) before extension of a lease can be sought meaning extensions can be obtained from completion of a purchase.
- Enfranchisement requirements for properties with commercial parts will have an increased threshold from 25% to 50%. Previously, it was not possible to enfranchise where a building had over 25% as commercial elements; the Act will increase this figure to 50% commercial effectively capturing a greater number of buildings and permitting leaseholders of these buildings greater opportunity to purchase the freehold or access Right to Manage.
Service charges and insurance
- Service charges will be demanded in a standard form to provide more clarity and ability for tenants to challenge unreasonable charges. There will be a standard format to be used for service charge invoices. There is also a requirement to provide regular information (including insurance details) to ensure more transparency for leaseholders.
- There will be a ban on commissions made on insurance by freeholders and/or managing agents; the Act will require transparency in respect of fees for placing insurance.
- The process of challenging unreasonable charges will be simplified for tenants and the presumption that leaseholders will bear the legal costs of any service charge challenge (and that these can be repassed through the service charge) will be removed.
Management of buildings
- Properties made up of freehold and leasehold elements will have equal rights ensuring that access to redress schemes for challenging poor landlord/managing agent practices is provided.
- There will be a maximum fee and time limit for the provision of home buying and selling information; the limits and fees will be set out in the statutory instrument.
- The Act will require those freeholders who manage any buildings to also belong to a redress scheme to enable challenge by leaseholders of charges (in the same way as managing agents are currently required to be).
further information
If you have any questions about any of the real estate issues covered in this blog, please contact Marisa Abrahams or a member of our Real Estate team.
ABOUT THE AUTHOR
Marisa acts for both landlords and tenants in commercial and residential disputes. Marisa is experienced in acting for a wide range of clients including large institutional developers, leisure and retail landlords and numerous private and public companies.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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