The Leasehold and Freehold Act: What You Should Know in 2024
The Leasehold and Freehold Reform Bill will get its second reading in the House of Lords on 27 March. And it looks like the government is keen to see it become law before the next general election.
In this newsletter, I explain what the Bill involves, when it will become law, and what the impact will be on the property sector.?
What Is a Leasehold??
To understand the Bill, you first need to understand the leasehold system and the problems surrounding it.
A leasehold agreement is when someone owns the right to live in a property for a period of time - the person who buys the right is known as the leaseholder.?
The leaseholder buys this right from the freeholder. The freeholder owns the building and usually the land it is built on.?
Leaseholds usually last 99–125 years. After this, the property is given back to the freeholder. During the leasehold agreement, the leaseholder has the option to ask to extend the lease. Freeholders can charge leaseholders additional fees such as ground rent and building management fees.?
Leasehold agreements usually apply to buildings with several dwellings, like flats. However, they can also apply to some houses. There are around 5 million leaseholders in the UK - and nearly 2 million of these are landlords in the private rented sector.
In recent decades, major issues have arisen surrounding the leasehold system. These include:
In many cases, this is affecting people’s lives. Growing families can’t move to bigger homes, people can’t relocate for work, and people get stuck in a worsening financial situation.
What Is the Leasehold and Freehold Reform Bill?
The Bill aims to solve the issues listed above by making wide-ranging reforms to the UK’s leasehold system.?
It comes hot on the heels of the Leasehold Reform (Ground Rent) Act 2022. This ensured that freeholders could only charge a peppercorn ground rent on all new leasehold agreements.?
The new rules being proposed under the Bill include:
Enable leaseholders to secure longer, cheaper extensions
Currently, lease extensions are capped at 90 years for flats and 50 years for houses. Under the new rules, leaseholders will be able to secure a 990-year lease extension for a nominal ground rent. Leaseholders also had to have lived in the property for at least two years before they could extend their lease. This has now been abolished.?
Make it easier for leaseholders to acquire their home’s freehold
The two-year period mentioned above also applies to a leaseholder’s right to buy the freehold. Under the new Bill, leaseholders will be able to buy their home’s freehold immediately.
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In some situations, leaseholders seek to buy their freehold as a group - for example, residents in a block of flats. The new rules make this cheaper and easier.?
This is also the case for mixed-use buildings - in other words, those with commercial premises and residences. In the past, leaseholders could only acquire the freehold if 25% or less of the building was commercial space. This has now been increased to 50%.
Greater clarity over service charges
Freeholders will have to provide greater clarity on how they calculate service charges. They will also have to provide service charge invoices in a standardised format. This will provide greater transparency and allow leaseholders to dispute unreasonable charges.
More transparency over buildings insurance
In the past, buildings insurance has been abused by some unscrupulous freeholders. Freeholders would compel leaseholders to buy insurance from a specific company. This company would charge them an inflated price and would pay a “commission” to the freeholder. Under the new Bill, freeholders and managing agents cannot earn commissions and must be transparent over any administration fees connected with insurance costs.?
Future leasehold agreements for houses will be banned
New leasehold agreements for houses will be banned when the Bill is implemented. Existing agreements will continue and the rule does not apply to flats, presumably to ensure that someone is responsible for the management of the building and any common areas.?
What Does the New Law Mean for the Housing Sector?
We welcome the new law. For many homeowners and landlords, leasehold is their only option to get a foothold on the property ladder. The current leasehold rules subject these people to unfair charges that take their control away and impact their finances and lives.?
Around 38% of leasehold agreements are held by private landlords. They face many of the same challenges as leaseholder-occupiers.?
They are presented with the choice of passing costs on to residents, which makes them less competitive, or absorbing the cost themselves and taking a loss.?
The new rules will make owning a leasehold property more affordable and attractive for landlords. Given that most leasehold properties are flats, the Bill could result in more affordable homes available to people on low incomes.
The downside is that some of the Bill only applies to new leases. This risks creating a two-tiered system, which may not help those already struggling with unfair agreements.?
The Bill will be challenging for freeholders who are likely to see their property income fall. This might make it harder for them to deliver building management services.?
The new legislation could also be a problem for local authorities. Many councils own a lot of property and use freehold income to fund services. Lots of local authorities are already on the brink of bankruptcy and this could put further financial pressure on them.
When Will the Leasehold and Reform Bill Become Law?
The government appears to be prioritising the Bill and it is currently on its second reading in the House of Lords. Many people expect the next general election to take place in November, so it’s likely that the Bill will be given Royal Assent before then.?
We’ll continue to monitor the Bill’s progress. Subscribe to our LinkedIn newsletter to stay up to date with this and other housing sector developments.?You can also subscribe to our monthly email newsletter for other important news and updates.