Leasehold and Freehold Reform Bill: Where are we now?

We summarised the key provisions of the Leasehold and Freehold Reform Bill in our insight at the end of November 2023. Now that the Bill has concluded its Third Reading in the House of Commons and has moved to the House of Lords for consideration, we have reviewed the amendments that have been made to the Bill during its passage through the House of Commons.

The Bill originally stood at 140 pages and now stands at 244 pages with a number of significant amendments being made during the House of Commons phase. The Bill has had its first reading in the House of Lords, which usually takes place without formal debate, and the second reading is on a date to be fixed.

What further changes does the Bill make to freehold acquisition and lease extensions?

• A proposed amendment to allow landlords to recover their non-litigation legal costs for low value claims to acquire an extended lease or freehold of a house or block of flats was rejected and costs recovery was further restricted by an express provision that landlords cannot recover any legal costs or shortfall on enfranchisement and lease extension claims by way of service charges, even if permitted under the lease.
• Where any leaseholder exercises a new right to reduce rent to a peppercorn where the unexpired term of the lease is over 150 years, there is a new express provision to confirm that the tenant is not liable for any costs incurred by the landlord as a result of the exercise of that right.
• There are new limited rights to acquire an extended lease of National Trust property.
• One element of the current calculation of a premium to acquire an extended lease is the deferment rate.  An amendment that the deferment rate should be set having regard to the desirability of encouraging leaseholders to acquire their freehold at the lowest possible cost was defeated. The Government is yet to publish details of the deferment and other rates involved the premium calculation.
• Amendments in the Bill clarify that in most cases those under shared ownership leases will be exempt from the right to collectively enfranchise their freehold but will be able to acquire extended leases.

What further changes does the Bill make to the administration of service charges paid by residential long leaseholders?

• There will be a new requirement to give a future demand for service charges within 18 months of service charges being incurred.  Secondary legislation will contain details as to the form and content of the future demand notice. Currently, a landlord must serve a Section 20B Notice notifying tenants that further service charges will become due within 18 months of those sums being incurred. This obligation will change to a future demand notice.  There will also be further legislation which may mean a tenant is not liable to pay any sum above an estimated cost, an expected contribution or an expected demand date set out in the future demand.
• The restriction on the recovery of litigation costs is widened so that a landlord is required to seek an order for costs in relation to any proceedings concerning a lease which means any proceedings concerning any term of the lease or the existence of the lease of a dwelling.
• Amendments are made to the regime to appoint a manager. A Tribunal can vary a management order on its own motion rather than only on the application of an interested party.  In addition, it will be a new requirement for managing agents to be part of a redress scheme. It will be a new ground for appointment of a manager if a relevant person has failed to become a member of a redress scheme and it is just and convenient to make the order in all of the circumstances of the case.
• There are new provisions about information to be given on the sale of a leasehold dwelling. There will be a prescribed form “sales information request” whereby the tenant will notify the landlord they intend to sell their long lease and setting out the information required by the tenant (provided that information is listed in secondary legislation to be published). The landlord will be required to notify the tenant where they are requesting the information from a third party, such as managing agents. Landlords will be able to charge a fee for responding to a sales information request but the Government can cap that fee. Where a landlord fails to comply, a tenant can apply to the Tribunal for an order to require the landlord to comply by a specified date, an order for damages (not exceeding £5,000), and/or if costs above a prescribed limit have been charged, an order for reimbursement of those costs.
• There will be a requirement for a landlord to be a member of a redress scheme. This will apply to both leasehold blocks and freehold estates where estate management charges are made. There will be financial penalties where there is a failure to comply.

What further changes does the Bill make to the administration of estate management charges?

• There are new provisions to introduce a right to appoint a manager over an estate where notice of complaint is served. The same test of just and convenience is imposed in the same way as currently exists for the appointment of a manager over a leasehold block or estate.
• The new provisions for a sales information request on the sale of a leasehold dwelling will also apply where a property which is part of an estate management scheme is sold.

Are there any other notable amendments?

• The Government has now amended the Bill to include a ban on the grant of long leases of houses except in limited circumstances. There is a new definition of “a house” for this purpose. The limited circumstances in which a lease of a house may be granted include where the landlord holds the house under a lease granted before 22 December 2017 and retirement housing leases. Where a lease is granted in breach of the provisions, there will be a right for the leaseholder to acquire the freehold and any superior lease for no premium.
• The Government has made some amendments to the Building Safety Act 2022 (“the BSA 2022”) within the Bill. For example, there is a new definition of “relevant steps” in Section 120(4A) of the BSA 2022.  Relevant steps in relation to a relevant defect means steps which prevent or reduce the likelihood of a fire or collapse of the building and mitigation rather than remedying a defect. Amendments are also made to the provisions regarding remediation orders and remediation contribution orders to include requiring a landlord to take relevant steps or pay the costs of relevant steps.
• Schedule 8 of the BSA 2022 is also amended to permit a management company to recover its legal costs of making an application for a remediation contribution order by way of service charges.
• There will be new duties on insolvency practitioners appointed in respect of higher-risk buildings where the accountable person is insolvent to give prescribed information a local authority and a fire and rescue authority.

The Government’s formal response to its consultation on ground rents in existing long residential leases is awaited. The Bill does not yet contain any proposals in relation to ground rents in existing leases but presumably these are on the horizon. The opposition have been critical of the numerous amendments made by the Government to the Bill as it has passed through Parliament. It is clear that there remains a long way to go before this Bill receives Royal Assent and there may be further substantial amendments made. Freeholders, landlords, investors and stakeholders in residential and mixed-use property will want to ensure that they continue to keep an eye on the Bill as it passes through Parliament as there are likely to be further changes to come.

It is also clear that rather than actively promoting commonhold as an alternative method of home ownership, the Bill aims to implement structural changes to the leasehold system. The recurring theme of the Bill is to reduce enfranchisement premiums and to remove or restrict a landlord’s ability to recover costs which it incurs upon a sale of the freehold, extension of a lease, upon responding to sales information requests and in disputes with leaseholders regarding arrears or breaches of the lease. The question is what long-term impact this will have not only on the residential sector but also on mixed-use buildings and high streets.

We are tracking developments on our Essential Residential Hub and our timeline: Changing residential landscapes in residential leasehold.

Please do not hesitate to contact Laura Bushaway, Lauren Fraser, Natalie Deuchar or your usual Charles Russell Speechlys contact if you have any queries.