Overview of the Leasehold and Freehold Reform Bill: What are the key provisions?
The Leasehold and Freehold Reform Bill was presented to Parliament on 27 November 2023. It is a lengthy Bill, at 140 pages, which if implemented, will make substantial changes to enfranchisement, lease extensions, right to manage, service charges payable under long residential leases and freehold estate management charges.
The Bill had its first reading in the House of Commons on 27 November 2023, however, it could be subject to significant further change as it makes its way through Parliament. In addition, with a general election potentially looming in 2024, there is no guarantee that the Bill will become law before that general election takes place.
Notably, the Bill does not deal with one of the announcements in the King’s Speech which was first publicised over 4 years ago, namely the banning of the creation of new leasehold houses. This is something which has been accounted for in the property market since the Government’s initial announcement but is actually missing from the current draft of the Bill. An article in the Times on 28 November 2023 entitled: “Bill to ban leaseholds doesn’t ban leaseholds, ministers admit” suggests that the Bill will either be reintroduced with the relevant provisions or amended at a later date.
What changes does the Bill make to freehold acquisition and lease extensions?
- It will no longer be necessary for a tenant to own the lease of a flat or a house for two years before they are able to extend the lease of the flat or house or purchase the freehold of the house.
- When extending their lease of a house or flat, a tenant will acquire a 990 year lease extension rather than an extension of 50 years for a house and 90 years for a flat with ground rent reduced to a peppercorn.
- The restriction on serving a further notice for an extended lease or to collectively purchase the freehold of a building where a claim is withdrawn or deemed withdrawn is removed. So, it would no longer be necessary for a tenant/nominee purchaser to wait 12 months from withdrawal before serving a further notice.
- The non-residential limit has been increased from 25% to 50% which is likely to bring more mixed-use buildings within the scope of collective enfranchisement.
- There are new rules about the acquisition of intermediate interests in a collective enfranchisement with different gateways for acquiring an intermediate lease with one being mandatory and the other being optional.
- There is new methodology for calculating the price payable for a statutory lease extension or freehold acquisition with marriage value removed and the treatment of grounds rents capped at 0.1%. The Government can prescribe rates used to calculate the enfranchisement premium (in secondary legislation), such as the deferment rate. Valuers will need to advise on how this alters the premiums on particular matters if the Bill were to become law but the general effect of the amendments will be that in most cases the premiums are reduced under the Bill when compared with the position under the current law. It may be that the full picture of valuation is not clear until the secondary legislation prescribing the relevant rates is published.
- There is a new right for leaseholders to require their landlord to take a leaseback of any unit not let to a participating tenant (including commercial units).
- There is a shift in the payment of landlord’s costs whereby tenants are no longer required to pay a landlord’s legal or professional fees as a result of a claim to extend the tenant’s lease or acquire the freehold except in certain limited circumstances. The limited circumstances are:
- Where there are Court or Tribunal proceedings and the Court/Tribunal has the power to award litigation costs under this section.
- Where a former tenant is liable to a successor in title to the extent those costs have been agreed.
- Where a tenant makes a claim which ceases to have effect for a reason which is not permitted (e.g. invalidity), a landlord can recover non-litigation costs up to a prescribed amount.
- Where the price payable for the freehold or extended lease is below a prescribed amount, the landlord’s costs are reasonable and do not exceed the prescribed amount, the tenant(s) are liable to pay the difference between the price payable and the costs incurred. Where the costs incurred by the landlord are reasonable and exceed the prescribed amount, the tenant(s) are liable to pay the difference between the price payable and the prescribed sum.
- There will be further regulations to deal with the apportionment of costs where there is more than one landlord.
- The jurisdiction of certain matters is transferred from the Court to the Tribunal and there is a new restriction against bringing proceedings in the High Court to avoid parties using the High Court as an alternative to the Tribunal for determining enfranchisement matters in the first instance.
What changes does the Bill make to RTM claims?
- The non-residential limit is increased from 25% to 50% bringing more claims in respect of mixed-use properties within scope.
- In an RTM claim, the RTM Company or a member of the RTM Company is no longer liable for the landlord’s legal fees except where there are Court or Tribunal proceedings and the Court/Tribunal has the power to award costs under this section. The Tribunal has the power to order costs where a claim notice is withdrawn or ceases to have effect and the RTM Company has acted unreasonably.
What changes does the Bill make to the administration of service charges paid by residential long leaseholders?
- The statutory regulation of service charges is extended to fixed service charges.
- There is a new requirement for service charge demands to be in a specified form and served in a specified manner, otherwise sums are not due.
- There is a new requirement for a written statement of account to be provided by landlords within 6 months of the end of the 12-month accounting period and to be accompanied by an annual report explaining the service charges. There will be a specified form for the statement of account.
- There is a new right for a leaseholder to require a landlord to provide specific information in relation to service charges and insurance. What falls within the scope of specified information will be determined by secondary legislation.
- The new rights to information detailed above will replace existing rights for a leaseholder to request inspection of invoices and receipts supporting service charge accounts.
- A failure to comply will no longer give rise to an offence and potential fine. Instead, a tenant can enforce via the Tribunal with an order for specific performance and damages of up to £5,000.
- The Bill prevents landlords from seeking to recover costs linked to placing and managing insurance via the service charge with the only charge which can be made being the insurance premium itself. A leaseholder will have a right to claim damages where prohibited sums for insurance have been included in the service charge.
- There will be a new duty on landlords to publish an administration charge schedule. For each charge, the schedule must show the amount of the charge or if it is not possible to determine its amount, how the amount will be determined. Regulations will follow with more information as to the form and content of the schedule.
- Under the Bill a landlord’s right to claim litigation costs from tenants of dwellings will be severely curtailed. A landlord will not be able to recover its litigation costs by way of service charges or administration charges unless an application is made to a Court/Tribunal to seek an order that those costs are payable by way of service charges or by way of administration charges by the defaulting lessee. The Court/Tribunal can make such an order if it is just and equitable to do so.
- The Bill also gives a new right to tenants to claim litigation costs from landlords by an implied term into their lease which if ordered by a Court /Tribunal means that landlords must pay the tenant’s litigation costs.
Does the Bill give any new rights to freeholders who pay estate management charges towards the upkeep of an estate?
- Under the Bill, freeholders will be given the ability to challenge the reasonableness of estate management charges in the same way as leaseholders can challenge the reasonableness of service charges currently. There are also provisions for a freeholder to consult with other freeholders contributing to the estate management charge in relation to works which exceed an appropriate amount to determined in secondary legislation in the same way as under Section 20 of the Landlord and Tenant Act 1985.
- Demands for estate management charges must also be in a specified form, with annual reports sent and further statutory rights to information also granted.
- The Government can publish a code of practice in relation to management of freehold estates.
Is there anything else contained in the Bill?
- A tenant of a qualifying lease of a house or a flat is given the right to vary the lease to pay a peppercorn rent. A qualifying lease is one where the unexpired term of the lease is more than 150 years. The Bill provides for a series of notices and counter-notices to be served which could be a potential area for disputes. Effectively, these provisions enable a leaseholder to buy out their ground rent without extending the term of their lease or buying the freehold.
The Bill has started its journey through Parliament and for many freeholders, investors, landlords and other stakeholders in residential leasehold property there is much in the Bill to consider. The Government’s consultation on reducing ground rents in existing leases closes on 21 December 2023 and the Government’s response to that consultation can be expected in 2024.