What the New Leasehold & Freehold Reform Act Means for You: Essential Insights for Property Investors

How resilient is your investment strategy in the face of legislative change? As property laws change, no strategy can afford to remain static. Understanding how the new Leasehold & Freehold Reform Act (2024) may shift the market is the first step in aligning your investment to unlock new opportunities. Join us as we examine what the future holds for property ownership in the UK and why you should be paying attention.

WHAT’S THE LEASEHOLD AND FREEHOLD REFORM ACT 2024?

The Leasehold and Freehold Reform Act 2024 (LFRA) introduces significant changes in UK property ownership laws. This legislation is set to reshape the landscape of leasehold and freehold property owners by introducing crucial reforms aimed at enhancing fairness and transparency in the housing sector.

Overall, this significant move aims to rebalance the relationship between freeholders (those who own the land) and leaseholders (those who own property on that land), improving the integrity of the housing market with standards of trust and fairness.

OVERVIEW OF THE REFORM ACT

The LFRA has been introduced to address long-standing issues within the property market, particularly those affecting leaseholders. Historically, leaseholders have faced rising ground rents and costly fees for extending their leases, and often with terms that impacted their financial stability and property rights. This Act aims to relieve such burdens by making the process more straightforward and less costly, thus giving leaseholders greater control over their properties.

Additionally, the Act introduces changes to freehold ownership to improve control and accountability in property management. This is especially significant in mixed-tenure buildings, where freeholders and leaseholders share space and resources. The new regulation ensures that all parties are treated fairly and that property management services are efficient and transparent.

Key Dates of the Reform Process

The Act was officially passed in May 2024, but leading up to this, there were several critical periods of consultation and legislative review. Here’s a brief overview:

• 2023: The government launched initial proposals and public consultations to gather input from a wide range of stakeholders, including property owners, legal experts, and tenant groups.
• Early 2024: The bill went through various readings and committee stages in Parliament, where amendments were made and eventually approved.
• Mid-2024: Royal Assent is granted, and the bill officially becomes law.
• Late 2024 and beyond: The first amendments are expected to take effect in July. Thereafter, the government determines the timeline for implementing the remainder of the Act, which means the next steps have yet to be decided. It’s anticipated that changes will progress in stages over the coming months and possibly a few years.

 

MAJOR PROVISIONS OF THE LEASEHOLD AND FREEHOLD REFORM BILL

A cornerstone of the Reform Bill related to the ending of ground rents on new leasehold properties. This move was designed to prevent the practices where leaseholders faced escalating ground rent charges, which could sometimes double every decade. Another provision aimed to simplify the process of buying the freehold or extending the lease of these homes.

The bill also introduced measures to make the process of managing and service charges more transparent and fairer. Leaseholders would have a clearer understanding and greater control over one of the significant costs associated with their properties.

WHAT ARE THE CHANGES INTRODUCED BY THE LEASEHOLD AND FREEHOLD REFORM ACT?

Beyond scrapping ground rents on new leasehold houses (with an “other than in exceptional circumstances” clause), the new Leasehold and Freehold Reform Act brings several amendments to enhance the rights of leaseholders, including:

Making Lease Extensions and Freehold Purchases More Affordable

One of the objectives of the Reform Bill is to make it more affordable for leaseholders to extend their leases or buy their freehold. While the original intention of the legislation is to reduce costs for leaseholders, the impact may vary depending on how long it’s left on the lease.

Those with a shorter lease, below 80 years, are likely to benefit the most. Traditionally, as a property’s lease lengthens (or shifts into a freehold), its market value tends to rise, thereby increasing the cost of extending the lease (or buying the freehold). This increase is largely due to the inclusion of marriage value, which is basically reflecting the potential increase in a property’s value.

Under the LFRA, the elimination of marriage value will mark a pivotal change. This means that leaseholders seeking to extend the lease or buy the freehold will no longer be required to split half of the property’s appreciated value with the freehold owner. As a result, the cost of lease extension or freehold purchase is expected to decrease after the relevant chapter of the Act is enforced.

SIMPLIFYING LEASE EXTENSIONS

One of the most impactful provisions in the LFRA allows leaseholders to extend their lease to a new standard term of 990 years. The new tenure replaces the shorter extensions of up to 50 and 90 years in houses and flats (in that order). This simplification for lease extensions gives leaseholders more control over their properties and reduces unnecessary financial burdens associated with leasehold agreements.

Originally, the consultation recognised concerns about ground rents reaching exorbitant amounts, opening the possibility of capping them on existing leases. While the government did not include specific provisions in the final bill to tackle high ground rents, leaseholders now have options to reduce their ground rent to a nominal amount, often referred to as a peppercorn rent (which is effectively £0) —either by extending the lease under the new terms or by exercising the legal right to buy out the ground rent entirely.

Another change that favours leaseholders is the removal of the two-year ownership requirement to extend their lease or buy their freehold.

INCREASED TRANSPARENCY AND FAIRNESS

The Act mandates greater transparency in how freeholds are managed. Freeholders and management agents are required to provide standardised and detailed bills for any charges associated with the property.

The LFRA also eliminates the requirement for leaseholders to pay their freeholders’ legal costs when disputing poor practices. This change will allow leaseholders to challenge unreasonable service charges without fearing hefty legal expenses.

Additionally, the LFRA targets building insurance commissions charged by freeholders and managing agents, often regarded as unclear and excessive. The ban of these practices, replaced with transparent, fair handling fees, ensures leaseholders only pay legitimate costs and can see the charges clearly.

Other provisions in the Act include making it easier and cheaper for leaseholders to take over building management and choose their managing agents. The LFRA also extends access to remedy schemes, allowing leaseholders to challenge poor practices more easily. Additionally, it requires freeholders who manage their buildings directly to join a redress scheme, similar to the requirement already in place for managing agents, providing leaseholders with a formal channel for disputes.

IMPACT OF LEASEHOLD AND FREEHOLD REFORMS ON PROPERTY OWNERSHIP

The recent reforms in leasehold and freehold regulations are poised to have significant impacts on property ownership in the UK. As the implementation of the new regulation unfolds, property investors and homeowners should consider engaging with legal advisers or property management experts to understand fully how the reforms impact their specific circumstances. Here are the anticipated effects for each side:

IMPLICATIONS FOR LEASEHOLD OWNERS

For leasehold property owners, the reforms may bring a slew of benefits aimed at enhancing their ownership experience and financial standing:

• Reduction in Costs: One of the most significant changes is the elimination or reduction of ground rents to zero, which can drastically decrease the annual expenses associated with owning a leasehold property.
• Extended Lease Terms: The ability to extend leases to 990 years not only simplifies the ownership but also increases the property’s market value.
• Greater Control and Transparency: The reforms also ensure that leaseholders have better control over their properties through increased transparency in service charges and management practices. This allows for more informed decision-making and dispute resolution.

IMPLICATIONS FOR FREEHOLD OWNERS

Freehold property owners will also notice changes, especially those who manage properties that include leasehold units:

• Management Obligations: There is an increased emphasis on the fair and transparent management of property, necessitating meticulous adherence to new regulations regarding how service charges are levied and justified.
• Increased Attractiveness of Leasehold Flats: With reduced costs and longer leases, leasehold flats may become more attractive investments. The certainty of costs and extended lease terms can make these properties more appealing to both renters and buyers. As owning leasehold properties becomes more attractive, we could see the value dynamics of freeholds shift.
• Reduced Disputes: With longer leases (thanks to 990-year extensions), tenants are less likely to face the stress and cost of extensions, potentially leading to a more stable tenant base and fewer disputes. Potentially saving time and money for the freeholder.
• Lower Profits from Lease Extensions: Previously, shorter leases meant higher profits when selling the freehold with a lease extension. Now, with longer leases the norm, those profits might be lower. (This only applies if you plan to sell the freehold in the future, not if you plan to keep renting the property out).

 Let’s not forget that overall, the leasehold and freehold reforms will bring a shift in how these properties are managed. While the rollout is likely to occur gradually, current and prospective property owners and investors, should consider how these changes could impact their property decisions and financial planning. For these reasons, engaging with legal and real estate professionals to fully understand these changes can prove crucial to future-proof your investment.

While these changes are posed to have a long-lasting effect on the leasehold and freehold dynamics, the demand for housing is certainly not decreasing anytime soon. And that’s why, despite of the ever-evolving regulatory landscape, converting a house into flats or venturing into the Co-living model offers both potential for high demand and a profitable investment.

PREPARE FOR THE FUTURE WITH THE LEASEHOLD AND FREEHOLD REFORM ACT

As the Leasehold and Freehold Reform Act sets to reshape the landscape of property ownership in the UK, it is crucial for property owners to understand and prepare for the changes. This preparation will not only ensure compliance but also help in maximising the benefits of the reforms.

STEPS PROPERTY OWNERS SHOULD TAKE POST-REFORM

1. Review Existing Agreements: Property owners should start by reviewing their current leasehold and freehold agreements to understand how the changes in the law will affect them. This involves assessing terms related to ground rents, service charges, and lease extensions.
2. Consult with Legal Experts: It’s advisable to consult with solicitors or legal advisors who specialise in property law. These professionals can provide insights into how the new regulations apply to your specific circumstances and what steps you need to take to align with them.
3. Inform Tenants and Leaseholders: For freeholders and landlords, educating your tenants or leaseholders about the changes can help manage expectations and maintain good relationships. This includes informing them of how the reform impacts their rights and responsibilities.
4. Financial Planning: Assess the financial impacts of the reform on your property value and income. This might include reevaluating your investment strategy, particularly if you rely on ground rents or were planning significant lease extensions.
5. Stay Informed: Keep up to date with any further amendments or guidance issued by the government as the reform is implemented. Subscribing to updates from relevant legal and property management resources is a practical way to start.

SUMMARISING THE LEASEHOLD AND FREEHOLD REFORM ACT

• The reforms seek to bring more stability to the property market by making leasehold terms fairer and more transparent. Key provisions include the abolition of new leasehold houses (but not for flats).
• Properties with favourable lease terms or those converted to freehold due to the reforms might see an increase in value. This could make them more attractive to buyers looking for hassle-free ownership options.
• As potential buyers become more aware of their rights and the reduced risks associated with leaseholds, there could be an increase in demand for these properties.
• It’s anticipated that the amendments will be introduced gradually over the coming months and years.
• The long-term success of the reforms will depend on rigorous enforcement and compliance. This means that property owners must stay vigilant about adhering to the new laws to avoid penalties.
• Engage with legal experts and property professionals to understand the specific impacts on your properties.
• Review property portfolio to reassess your long-term investment strategies considering the new landscape. For investors, this may involve shifting focus towards properties with more stable long-term returns rather than relying on income from ground rents.

Whether you are a seasoned investor or a new property owner, staying well-informed about these reforms is crucial to navigating the complexities of the property market more effectively. Engaging with property law experts or attending seminars on the new reforms can also be beneficial, ensuring you fully understand your rights and responsibilities.

Every successful real estate project starts with a great idea and succeeds with a great team. We understand the high stakes involved in property investment, that’s why we offer an extensive array of consulting services—from building regulations and planning, to project management and interior design, all tailored to enhance your property, and whether it’s about your own home or the next step in your growing your portfolio.

Connect with our HMO Architects team through a free discovery call and let us help you align your project with industry-leading insights and designs.

A BRIEF HISTORY OF FREEHOLD AND LEASEHOLD

The freehold and leasehold ownership system has deep historical roots in English common law, originating from the medieval land tenure system. In this system, the Crown owned all land, and the rights to use the land were granted to various lords, who, in turn, could grant portions of this land to tenants.

In the UK property market, the concepts of freehold and leasehold define the extent of ownership and control over a property. A freehold interest in a property means that the owner indefinitely controls the land and the buildings on it. In contrast, a leasehold interest grants the holder the right to use and occupy the property for a specific period as determined by the lease terms, after which the property reverts to the freeholder.

This distinction deeply impacts everything from property value to the rights and responsibilities of the occupants. Freeholders are responsible for the maintenance and management of the land, whereas leaseholders might have to pay service charges and ground rent and typically need permission from the freeholder to make certain changes to the property.

Over the past 50 years, the freehold and leasehold system has undergone several changes, particularly in terms of legal reforms aimed at improving the rights of leaseholders:

1. Leasehold Reform Act 1967: This was one of the first major pieces of legislation to provide leaseholders with the right to buy the freehold of their homes or extend their leases, a significant shift aimed at correcting imbalances in the traditional leasehold system.
2. Landlord and Tenant Act 1987: This act further reformed the system by improving the regulation of service charges, among other protections for tenants, making the system more transparent and fairer. However, the reform faced criticism over shortcomings, such as its complexity and lack of robust enforcement mechanisms, that limited its effectiveness.
3. Leasehold Reform, Housing and Urban Development Act 1993: This act extended the rights of leaseholders, including the right to collective enfranchisement, where leaseholders of flats can come together to buy the freehold of their building.
4. Commonhold and Leasehold Reform Act 2002: Introduced the concept of commonhold, a new property ownership alternative to leasehold, allowing individuals to own their ‘unit’ in a multi-occupancy building outright, with shared responsibility for common areas.
5. Latest Developments: Following years of increasing scrutiny and criticism of the leasehold system, especially concerning high and escalating ground rents and other unfair practices. The UK government has approved new reforms to make the system more equitable. The Leasehold and Freehold Reform Act (2024) introduces new rules, such as banning leaseholds for new houses and setting ground rents to zero for new leases.