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Freehold and leasehold reform – what's it all about?

Posted on 4 July 2024

For many years, the Government has been banging the drum for leasehold reform. But why? From a lawyer's point of view, the leasehold system works and is well understood. That's not to say that there shouldn't be improvements, but the provisions of the hastily enacted Freehold and Leasehold Reform Act 2024 constitute a real shake up of the law.

The headline provisions of the new Act are now familiar: extending leases by 990 years instead of 90, permitting claims without requiring prior periods of ownership; increasing the ability of tenants in mixed use developments to acquire their blocks and changing the method of valuation for freehold and leasehold enfranchisement claims, making it less expensive.

One highly controversial proposal which has not found its way into the Act is the capping of ground rents in long leases. It was clear that dealing with this issue was definitely in the "too difficult" pile. We will wait to see whether whichever party wins the election decides to pick up the baton again.

The flurry of excitement over potential human rights cases attached to the abolition of ground rent could now be replaced with anticipation of claims related to the cap on ground rent to a "notional ground rent" of 0.1% of the market value of the premises for valuation purposes and removal of the payment of any share of marriage value to the landlord on lease extensions. The effect of these provisions may not be as sweeping as a blanket cap on all ground rents, but by making a statutory claim, in some cases, tenants will be able to buy out the rent without paying market value and deprive the landlord of value which would otherwise have been released on a sale to a sitting tenant.

The new measures are intended to help leaseholders take back control of their blocks, which is seen as a good thing. But is it? Managing a building is not a job for the faint-hearted. The new proposals will apply as much to properties containing 3-4 flats as well as huge developments with hundreds of flats.

Human nature being what it is, in many cases, left to self-regulate, the temptation will be for leaseholders to go it alone, without incurring the cost of guidance and assistance from a professional managing agent. But this is likely to lead to mismanagement, higher costs and fractious relationships between tenants who cannot agree on items of major expenditure.

For those who adopt the sensible precaution of instructing managing agents, as highlighted during its passage through the House of Lords, the Act does not contain provisions for an independent property agent regulator.  Regulation of managing agents has been a recurring theme in the industry and is long overdue. Given that agents will manage most blocks, ensuring a minimum standard of qualification would go some way to improve the deal for leaseholders.  

In the meantime, the Act does contain further provisions about the regulation of service charges but what is disappointing is that so many of the provisions of the Act require further detailed regulations before they can take effect. The Act could be passed more quickly as a result but reliance on so much secondary legislation may be a case of more haste, less speed. Regulations come under far less scrutiny than statute and, given the state of the statute what can we expect? The devil will, most certainly, be in the detail.

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