The Leasehold And Freehold Reform Act 2024 – A Welcome Change
Authors: Courtney Wilbor & Joshua Prior
Key Contacts: Jennifer Butcher & Liz Gibbons
On 24 May 2024, the long-awaited Leasehold and Freehold Reform Act 2024 (“the Act”) received Royal Assent. Whilst, as a result of the announcement of the general election and the subsequent dissolution of Parliament, we are yet to obtain an implementation date for the Act, the legislation aims to promote the rights of long leaseholders to be more alike to their freehold counterparts through a series of reforms. Such reforms include:
- A ban on the grant of long residential leases of houses (unless there is an exception). From when the Act takes effect, no newly built houses may be held by a lease;
- An increase in the standard lease extension term;
- A removal on the limitations on the right to extend your lease;
- An extension to the applicability of the right to manage; and
- An increase in the applicability of leasehold collective enfranchisement (the right to collectively purchase the freehold).
Lease Extensions
One of the disadvantages of owning a leasehold property, as opposed to freehold, is that its value reduces over time; the less time left on your lease, the lower the value of the lease – who would want to buy a property which they can only own for five years? There are current legislative provisions which allow leaseholders to extend their term: they can extend the existing term by 90 years if they have owned the property for at least two years, and if the lease was originally granted for at least 21 years. Further, your landlord must not be a charitable housing trust where the lease has been granted as a part of the charity’s work. The extended term will not be subject to a rent nor a ground rent, however an upfront sum will be payable upon extension.
The Act reforms this so that there is no restriction on how long you must have owned the leasehold property for, and instead of only being able to extend the term by 90 years, leaseholders will now be able to extend by 990 years. This is a big win for leaseholders whose property value is partly determined by the remaining term.
Acuity Law has significant experience in extending the terms of our clients’ leases and we would invite you to speak to Jennifer Butcher if you would like to explore this entitlement.
The Right to Manage
The right to manage (“RTM”) is a form of enfranchisement established by the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) enabling leaseholders in a block of flats to assume the management responsibilities of that block of flats, subject to the fulfilment of certain criteria. This is particularly desirable when landlords and managing agents neglect to maintain the buildings for which they are responsible and charge exorbitant service charges for the lack of service. By forming an RTM company and having not less than 50% of the leaseholders in the building support the claim, together with other specific requirements, conscientious owners can ensure that their home is managed to their standards in a cost-effective manner.
Currently, a building is only eligible for RTM if the internal floor area used (or intended to be used) for non-residential purposes (excluding common parts) does not exceed 25% of the premises’ total internal floor area. If the Act becomes effective, this will be reformed to replace 25% with 50% – meaning a larger number of buildings will be eligible for RTM.
Under the 2002 Act, it is for the RTM Company to pay the claim recipients’ costs (the freeholder, managing party, and any intermediate landlords). The Act amends this so that each party is now largely responsible for their own costs only. There are some exceptions to this such as where the RTM company has acted unreasonably or where it withdraws a claim notice, or it otherwise ceases to have effect.
Partner Liz Gibbons is experienced in pursuing right to manage claims, having built a team and streamlined process at Acuity. She would also be happy to introduce any interested leaseholders to local management companies who would be happy to discuss managing your building after a successful claim.
Collective Enfranchisement
Whilst we have already touched upon enfranchisement in the context of RTM claims, collective enfranchisement differs from this in that, provided at least 50% of the qualifying tenants participate (and the building itself qualifies), the landlord cannot refuse their purchase of the freehold of that building.
Previously, under the Leasehold Reform Housing and Urban Development Act 1993 (“the 1993 Act”), for a building to qualify it must have contained at least two flats, with at least two-thirds of such flats being owned by qualifying tenants. In this regard, a qualifying tenant is a leaseholder with a lease that was initially granted for at least 21 years. Practically, most leases are granted for a term of 99 or 125 years and therefore fall within this criterion (albeit there are some exceptions to this general rule such as leases granted under a right to buy or a shared ownership lease where the tenant’s share is 100%).
As with the reforms to RTM claims, the Act provides that the internal floor area used (or intended to be used) for non-residential purposes (excluding common parts) should not exceed 50% of the premises’ total internal floor area, up from 25% previously, again undoubtedly increasing the number of eligible buildings.
The Act also permits leaseholders to require landlords to take a leaseback of any non-participating flats and non-qualifying areas of the building in the event of a collective enfranchisement claim. This may provide significant benefits for leaseholders as it could make the freehold purchase price cheaper.
Another potential saving point for leaseholders concerns “marriage value”, a figure previously used to reflect the increase in value arising from the joining of the freehold and leasehold interests. Prior to the Act, this figure was shared equally between tenants and the landlord. However, the Act abolishes the payment of marriage value in its entirety.
At Acuity Law, our Real Estate and Property Litigation teams have extensive experience in building, assisting and managing collective enfranchisement claims. Should you wish to discuss this, or any of the other points raised in this article, please contact either Liz Gibbons or Jennifer Butcher.
