The Leasehold and Freehold Reform Act 2024 – An Overview

Piers Harrison gives an overview of the new Leasehold & Freehold Reform Act 2024.

The Leasehold and Freehold Reform Act 2024 had a chequered passage through Parliament eventually receiving Royal Assent on 24^th May 2024, the last day of that Parliament. When first introduced the Bill did not fulfil the election pledge to ban the grant of new long residential leases of houses, nor the expected abolition or capping of ground rents. Mid-way through the Bill was amended bringing in the ban on leasehold houses, but ground rents were neither abolished nor capped. There are many new rights introduced along with changes to existing rights and obligations. They amount to a complete change in the landscape of landlord and tenant relations. Some only of the more prominent are commented on below.

Ban on Leasehold Houses

Part 1 of the Act brings in the “ban” on the grant or assignment of certain long residential leases of houses. Although the grant of a leasehold house (save for exceptions explored below) is no longer permitted, any such grant is effective but the tenant acquires with the lease a new remedy a “Right to Acquire” all superior interests. The Act introduces new definitions for “house”, “long term”, “residential lease” and “permitted lease”, the last being the class of lease which is exempt from the ban.

It remains to be seen whether Part 1 would ban the sale of a house sold on a “flat-style” lease i.e. one where the structure is not demised. In Freehold Properties 250 Ltd v Field [2020] EWHC 792, Marcus Smith J held that the lease of such a house did not fall within the 1967 Act on the basis that the tenant only had a lease of part of a house. If Part 1 did not apply to such a lease this would be an obvious avoidance device in the case of a simple detached house. On the other hand where a house forms part of a more complex structure with a shared roof and structure it might be seen as desirable that the freeholder should be able to grant a lease of each house but retain the structure. The new Act permits the Secretary of State to amend the key definitions in this Part so there is flexibility to close any perceived gap.

Permitted Leases are identified in Schedule 1. There are two categories permitted lease categories: where tribunal certification is required and where self-certification applies. In the former category a vendor must apply to the FTT to obtain a permitted lease certificate before the house can be marketed for sale. Into this category fall historic leasehold estates, community housing leases, retirement housing leases and National Trust properties. The self-certification category includes shared ownership leases and home finance plan leases.

The Act restricts the marketing of leasehold houses and provide for enforcement of the ban by trading standards authorities. Much of the detail of how the new Right to Acquire will work will be set out in future secondary legislation.

Leasehold Enfranchisement

Part 2 of the Act amends the existing enfranchisement legislation widening the eligibility criteria for the 1967 Act and the 1993 Act, making enfranchisement cheaper by abolishing marriage value in the valuation process, and introducing a standard lease extension term for houses and flats of 990-years. The other signal changes here are the removal of the two year qualifying period, the right to foist a leaseback on the freeholder and the inclusion of mixed use buildings where the non-residential part does not exceed 50% (previously 25%). The last two changes together are particularly powerful  in combination and will allow tenants to acquire the freehold of buildings which were previously exempt and/or unaffordable.

Part 2 also transfers jurisdiction from the county court to the FTT in relation to most enfranchisement disputes. The intention is in line with the aim to make enfranchisement cheaper and easier for tenants, but it is possible that there is an unintended consequence. Many disputes over the validity of notices are not taken to court by landlords because (a) in most instances a fresh notice can be served and (b) the landlord is wary of the possibility of being ordered to pay the costs of a successful tenant. Given the high bar to recover costs in the FTT it is possible that this might encourage litigation over the validity of notices, particularly in cases with mixed merits. Offsetting that are the new provisions setting out a general rule that tenants are not liable for any costs incurred by a landlord in a claim under the 1967 Act or 1993 Act. Under the existing legislation landlords cannot recover tribunal costs, but the abolition of the ability to recover any costs might cause landlord to seek to minimize costs generally, potentially promoting early settlement.

New right to vary a long lease

In Part 3 there is a new right introduced to vary a long lease, without extending the term, to replace the rent with a peppercorn rent. The procedure for doing so is very similar to the existing procedure for claiming a new long lease i.e. service of a notice of claim, which is registrable, binds successors if registered, is assignable only with the lease, and which is suspended if there is a collective claim. This would be applicable where the tenant already has a long lease, has no need to extend it, but wishes to pay a lump sum to replace the rent with a peppercorn. The valuation approach is the same as that adopted for valuation of the term in a lease extension claim.

Leasehold Reform

Part 4 contain a host of measures relating to the regulation of leaseholds. These include the extension of regulation to fixed service charges, the introduction of a duty to publish administration charge schedules, and the following:

• the introduction of standard form service charge demands,
• a new requirement for a written Statement of Account to be provided by landlords within 6 months of the end of the 12-month accounting period for which service charges apply, as well as an obligation on landlords to provide an annual report to leaseholders,
• a new right for tenants to request information from their landlord, and
• a new penal regime for the enforcement of duties relating to service charges.

As to the last point a tenant may make an application to the tribunal for an order that the landlord comply with one of the duties bulleted above and/or an order that the landlord pay damages not exceeding £5,000 to the tenant. The combination of new measures and the ability to compensate tenants (or punish landlords?) for non-compliance is a heady cocktail and seems likely to provoke litigation.

Insurance

Another new measure seeks to prevent excluded insurance costs from being charged in a variable service charge and creates a new right to claim damages through the Tribunal when a tenant considers that these excluded insurance costs or related insurance costs have been charged. There has been considerable litigation over insurance costs over the years and the murky difference between the gross premium and net premium, which might include a commission element for a broker or to be shared in part between a broker and a client.  The new provisions and as yet unpublished regulations defining a “permitted insurance payment” seek to exclude commissions shared with landlords and limit the recoverable costs for placing insurance to a cost that is commensurate with work and time undertaken.

On an application to the Tribunal for damages in a case where the tenant has paid any excluded insurance costs, the damages are capped at an amount that is three times the amount of the excluded insurance cost; a powerful incentive for landlords to comply and for tenants to sue!

Costs

Huge changes have been made on costs. One such replaces the familiar s.20C LTA 1985, which gives the court or Tribunal a discretionary power to disallow the recovery of legal costs through service charges, with a new s.20CA, which creates a general rule that a landlord’s litigation costs are not to be regarded as relevant costs when determining the amount of a variable service charge and requires landlords to make an application to the relevant court or tribunal for an order disapplying the general rule to any of their litigation costs. The court or tribunal can make such order as it considers just and equitable.

It gets worse for landlords because the Act introduces new section 30J LTA 1985 which implies a term into leases which gives leaseholders a right to apply to the relevant court or tribunal for an order that their landlord pay any or all of their litigation costs incurred in connection with “relevant proceedings concerning the lease”. The relevant proceedings have to “relate to a matter of a description specified in regulations made by the appropriate authority” – so the precise scope is unclear. Again the court The court or tribunal can make such order as it considers just and equitable. In a service charge dispute it is rare for a landlord to make 100% recovery and it remains to be seen how successful a tenant will need to be in order to obtain an order. In time no doubt Upper Tribunal cases will hammer out some guidelines, but even then, given the width of the discretion, this is likely to remain the subject of much litigation.

The third whammy on costs is a provision which prohibits the recovery of non-litigation (process) costs of enfranchisement, extension and right to manage through variable service charges. Litigation costs would already be covered by s.20CA. This provision is to prevent a landlord seeking to recover enfranchisement or RTM costs through the service charge (or otherwise). Most current leases would not permit recovery of such costs but this amendment closes the door on any future attempt to allow recovery.

Part 5 introduces regulation of freehold estates and grants freehold homeowners on estates similar rights of redress as leaseholders including: limiting charges on grounds of reasonableness; introducing consultation requirements; introducing a right to have the Tribunal determine the reasonableness of an estate management charge; standardisation of the form of demands; a requirement for an annual report; a right to request information; a similar right to apply to the Tribunal for enforcement and damages; a duty to publish administration charge schedules; and a right to apply to the Tribunal to appoint a substitute manager.

The overall impression is that the Act seems likely to shift the balance of power in landlord and tenant litigation. Tenants have been granted new rights and will feel emboldened to use those and existing rights by the changes made in relation to cost recovery. Landlords on the other hand will see cost recovery in enfranchisement claims disappear and see it severely limited in other cases. In other areas landlord will see existing income streams from insurance disappear, more regulations to be complied with and new enforcement measures including awards of damages. As for practitioners there is plenty of new law to be absorbed, more coming in the form of secondary legislation, and new causes of actions to be explored in litigation. What a time to be a litigator!

This article first appeared as an Editorial in the Landlord and Tenant Review and is reproduced here with the kind permission of the publisher.