Leasehold reform 2024: Leasehold and Freehold Reform Bill receives Royal Assent

Callie Tuplin, specialist lease extension solicitor at Holmes & Hills, writes an update for leaseholders following the Leasehold and Freehold Reform Act 2024 receiving Royal Assent on 24th May 2024.

The Leasehold and Freehold Reform Act 2024

When the general election was announced on Wednesday 22nd May by Rishi Sunak, I think many of us specialist leasehold enfranchisement professionals thought the Reforms would be shelved and that we would all have to wait until the ‘new’ government was elected.

During the final stages of the current Government, the ‘wash-up’ was held on the afternoon of Friday 24th May. The ‘wash-up’ refers to the formal process of bringing through the last pieces of legislation that are pending in the House of Lords. Many of us thought that the Leasehold and Freehold Reform Bill had not reached the necessary stage to be pulled in to the ‘wash-up’, but surprisingly and thankfully we were wrong.

After years of campaigning, Law Commission reports, debates and numerous responses to Government consultations concerning reform, we finally have the Leasehold and Freehold Reform Act.

On 24th May 2024 the new Leasehold and Freehold Reform Bill received Royal Assent and is now the Leasehold and Freehold Reform Act 2024 (the Act).

What does this mean for leaseholders now?

Whilst the new Act has received Royal Assent it has yet to be implemented either in part or in full. Usually, a new Act, or parts of it, would be implemented within 6 months of receiving Royal Assent.

However, as a general election has been called and the Government prorogued, it will be up to the ‘new’ Government to decide when it will be implemented and come in to force. When his will be will not be known until after the general election which is being held on 4th July 2024.

The rates to be applied to a new ‘calculator’ to establish the premiums payable will also need to be introduced through secondary legislation and therefore will not apply until those rates are set out.

So what does the new Act look like and how will this affect thousands of leaseholders?

Sadly, the proposal to cap ground rents at £250 per year or reducing them to a lower amount did not make it into the Act, nor did the abolition of forfeiture. However, the changes that did make it into the Act are as follows:

Statutory Lease Extension:

1. The extended term is to increase to 990 years instead of 90 years.
2. Removal of the requirement to have owned a property for 2 years before having a statutory right to extend a lease. – This should make buying and selling leasehold properties easier and cheaper as the Seller will not have to incur costs in commencing and assigning the claim and the Buyer will not need the Seller to agree to commencing the claim as part of the sale/purchase.
3. Freeholders to pay their own costs incurred as part of the lease extension, except in certain circumstance i.e., low value claims – this change could reduce the cost of extending a lease for a leaseholder by several £1,000s.
4. The removal of ‘marriage value’ – this change has the potential to dramatically reduce the cost of extending a lease for owners of property where the lease has fewer than 80 years remaining.
5. Ministers are to prescribe the important deferment and capitalisation rates. At present it is not known what these rates will be or when they will be set. Once set, the rates will be reviewed every 5-10 years;
   1. For leaseholders with a lease that already has less than 80 years remaining, depending on what the rates are eventually set at, this change could reduce the cost-savings arising from the removal of ‘marriage value’.
   2. For leaseholders with a lease that currently has more than 80 years remaining, depending on what the rates are eventually set at, this change could reduce or increase the cost of extending a lease.

Collective Enfranchisement

1. Increasing the commercial property threshold from 25% to 50% in collective enfranchisement claims – this change will grant more leaseholders the potential ability to collectively enfranchise, subject to other requirements being met (such as required number of participants).
2. Freeholders can be forced to retain any non-participants flats and commercial areas to reduce the premium – this change could reduce the cost of collectively enfranchising
3. Freeholders to pay their own costs except in certain circumstance i.e., low value claims – this change could reduce the cost of collectively enfranchising for participating leaseholders.
4. The removal of marriage value – where a freehold building is subject to leases which already have a remaining term of less than 80 years, the cost of collectively enfranchising is likely to be lower.

The majority of the above points are largely non-controversial but the removal of marriage value and a set calculator with prescribed rates (which are not yet known) are potentially open to challenge by interested parties, through Judicial Review.

Will it cost less to extend a lease in future?

Whilst the removal of marriage value is a good thing for leaseholders who own a property with a lease that already has less than 80 years remaining, and the requirement for freeholders to cover their own costs (other than in certain circumstances) will benefit leaseholders regardless of remaining term, until deferment and capitalisation rates are set, this question cannot be answered with certainty. A situation could arise where leaseholders with a lease term currently below 80 years benefit from the reforms, but those with a lease term above 80 years benefit to far lesser degree, or indeed find it costs more to extend their lease.

I have a statutory lease extension underway, will I now get a 990 year extension instead of a 90 year extension?

As mentioned, the Leasehold and Freehold Reform Act 2024 is not yet in force and therefore the changes brought about by the legislation do not yet apply. Therefore, if your lease extension completes prior to the Act coming into force, your lease will be extended by 90 years, as current legislation will apply.

I have a lease extension underway, will it now cost less to extend the lease?

As mentioned, the Leasehold and Freehold Reform Act 2024 is not yet in force and therefore the changes brought about by the legislation do not yet apply. Therefore, if you proceed with extending your lease now, the costs associated with extending your lease will not have changed from what have previously been set out/estimated.

I have a lease extension underway, do I still have to pay my freeholder’s costs?

As mentioned, the Leasehold and Freehold Reform Act 2024 is not yet in force and therefore the changes brought about by the legislation do not yet apply. Therefore, if you proceed with extending your lease now, you will still need to cover your freeholder’s professional costs.

I have a lease extension currently underway, should I halt this and wait?

For those who are currently actively in the process of extending their lease, where the lease has more than 80 years remaining, you would in future potentially benefit from not having to pay your freeholder’s professional costs associated with the lease extension. However, if you are currently part-way through the process, it is likely that you are already liable for all, or a portion of, your freeholder’s professional costs already incurred by them as part of the process underway. You would also have already incurred a proportion of the costs quoted by Holmes & Hills which would need to be paid if the lease extension was paused. Paying these costs would reduce the benefit arising from delaying the lease extension until after the new legislation comes into force (the date for which is not known).

Those currently extending their lease and who are due to benefit from a lease extension of 90 years (statutory) or some other term less than 990 years may be considering waiting until they can obtain a 990 year lease extension via the statutory process, under the new legislation, once this is in force. Leaseholders should weigh the costs of delaying (professional costs already incurred), as well as the impact of delay, against having an extended lease term of 990 years compared to some other extended lease term of less than 990 years.

Difference in lease length is already a characteristic of the property market, with a wide range of term lengths existing. Two properties in the same locality, which are otherwise very similar can already have vastly different remaining term lengths. This is due to:

• Newer leasehold properties most likely having been sold with leases of 125, 250 or 990 years.
• Older leasehold properties having been extended via the non-statutory process, up to 99 or 125 years.
• Older properties have been extended via the current statutory process, by 90 years.

For many decades to come the property market will continue to contain leasehold properties with a wide range of remaining lease lengths. Following the new legislation coming into force at some future date, the number and proportion of leasehold properties with a lease length over 900 years will gradually increase (over decades) as more leaseholders extend their lease with every year that passes.

Currently, a remaining lease term of approximately 90 years or less will potentially make a leasehold property more difficult to sell, subject to local property stock and conditions, meaning it may take longer to sell and will potentially sell for less. However, once the new legislation is in force and ‘marriage value’ is removed, this could change how properties with lease terms less than 90 years are valued by the market as there would no longer be a material and unknown cost on the horizon.

In decades to come it may be that properties with a remaining term of closer to 990 years have a more positive valuation compared to properties with lease terms of, for instance, 150+ years, all other things being equal and subject to local property market stock and conditions at any given point. However, this is not currently a characteristic of the property market, reducing the benefit of delaying extending a lease for this reason.