The long-awaited Leasehold Reform Act has finally escaped Parliament’s legislative maze and become law. We briefly touched on the passing of the Leasehold and Freehold Reform Bill, now the Leasehold and Freehold Reform Act, in an article summarising the parliamentary “wash-up” period before the general election.
Find out more about some of the other important bills that passed before the dissolution of Parliament here.
Today though, we take an in-depth look at the Leasehold and Freehold Reform Act. Despite the drumming up of the act by the government as a landmark piece of legislation, it has been beset by hurdles since its inception. Originally touted as a bill to fundamentally reform, and eventually abolish the leasehold system, it has been significantly watered down over time.
Particularly controversial has been the failure to reduce ground rent to zero, a feature which formed part of the Conservative Party’s 2019 election manifesto. But what changes does the Leasehold and Freehold Reform Act make to the leasehold system?
Let’s find out.
Banning the sale of new leasehold houses
Leasehold, which dates back to feudal society, means that leaseholders own their property but not the land it is on. For flats this is arguably a more logical arrangement than it is for houses given that those who live in flats share the land they live on with others.
Many leasehold new build houses have ground rents which double every ten years, something which can lead to costs spiralling out of control for owners. For example, ground rents may start at £1000 a year, but after 40 years of doubling every decade they could be costing someone £16,000 a year!
To tackle this, the government included a ban on the sale of new leasehold houses in the act other than in “exceptional circumstances”. The intention of this is to ensure that every new house in England and Wales will be freehold from the outset. Scotland, on the other hand, fully abolished leasehold in 2012.
Make it cheaper and easier to extend a lease or buy the freehold
Another major change is the announcement that the Act will make it cheaper and easier for existing leaseholders who live in houses and flats to both extend their leasehold and buy the freehold for the property.
It will also see the introduction of a new standard lease extension term of 990 years for leasehold flats and houses, up from the current 90 years. This will give greater security of ownership for leaseholders by ensuring they do not have to worry about future lease extensions.
Furthermore, leaseholders will no longer have to wait two years to benefit from the aforementioned changes as this stipulation is being removed. This will be greatly welcomed by leaseholders by giving them greater rights over their property from day one of ownership.
Expands rights for leaseholders to manage their building
The Leasehold and Freehold Reform Act will also supposedly make it cheaper and easier for leaseholders to take over the management of their building.
At the moment, leaseholders who live in mixed-use buildings (ones which are both residential and non-residential), are unable to collectively buy the freeholder or take on the right to manage the building if more than 25% of it is non-residential. This is now being increased to 50%, meaning a greater number of leaseholders will be able to take on the right to manage their building.
Greater transparency for leaseholders
Another aspect of the Act is giving leaseholders greater transparency over their service charges. This will be done by ensuring that freeholders and managing agents issue their service charges in a “standardised format” which can be more easily scrutinised and challenged by leaseholders.
Scrapping the presumption that leaseholders pay their freeholders’ legal costs
Currently, leaseholders who wish to challenge poor practise by freeholders face the barrier of being the party which is presumed to have to pay the freeholders’ legal costs.
The Leasehold and Reform Act subsequently removes this presumption.
Expanding rights of redress
Rights of redress will also be greatly expanded by extending access to redress schemes for leaseholders to challenge poor practise. Freeholders who manage their building directly will be required by the government to belong to a redress scheme, allowing leaseholders to challenge them directly.
Furthermore, homeowners who own leasehold properties on private and mixed tenures estates will be granted comprehensive rights of redress by the Leasehold and Freehold Reform Act. They will also receive more information about the charges they pay and the ability to challenge how reasonable those charges are.
What happens now the Leasehold and Freehold Reform Act has passed?
It is our observation that despite that the leasehold bill has been passed into law, key measures such as banning leasehold houses and abolishing marriage value will not come into force for up to two years. Ground rent for existing leaseholders remains unchanged, and there is no ban on the forfeiture of long residential leases. Additional legislation is needed to fill in the gaps, with potential implications for lease extension costs. The bill is seen as a starting point, with ongoing concerns about leasehold contracts and costs that may need to be addressed by the Competition and Markets Authority.
While the changes have become law, it’s important to point out that the Leasehold and Freehold Reform Act has not yet taken effect. Nor is it yet known exactly when they will. The course that the future of the leasehold system takes is largely dependent on the outcome of the upcoming UK general election on the 4th of July.
How do the two main parties differ on leasehold reform?
While the governing Conservative Party previously pledged to scrap ground rent, which failed to come to fruition, the Labour Party have consistently promised to fundamentally transform the system entirely. Nevertheless, the dropping of their previous pledge to abolish the leasehold system within 100 days will cause a certain amount of consternation for leaseholders.
The Labour Party continue to maintain that they plan to replace leasehold with a ‘fairer’ system like commonhold, however it remains to be seen what measures will be included in both parties’ election manifestos.
Of course, we at Lisa’s Law will do our very best to keep you updated on any changes. Until then, subscribe to our newsletter so you don’t miss anything!
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