What Housing Associations Need to Know about the Leasehold and Freehold Reform Act 2024

The Leasehold and Freehold Reform Act 2024 received the royal assent just before parliament was dissolved when the election was called on 22 May. There are three areas which are of particular interest to housing associations which are looked at below. These are in relation to leasehold houses, lease extensions and enfranchisements, and ground rent. The Act deals extensively with matters relating to service charges and management. This is not covered in detail here but there is brief mention of new protections given to freeholders paying estate charges and rent charges.

Ban on New Leasehold Houses

• New long leases (more than 21 years) of houses will generally not be permitted under the Act, although there are some exceptions
• It will not be permitted to market new houses as leasehold. Leases of houses granted in breach of the provisions cannot be sold and there will be financial penalties.
• Leases of houses will be permitted if they are granted out of a superior lease entered into before 22 December 20217. Community housing leases and retirement housing leases are also permitted. These leases will require tribunal certification.
• In other cases, self-certification will be possible, including for shared ownership leases and home finance house leases.
• Shared ownership house leases must allow for the purchase of additional shares of 25% or less, staircasing to 100% and the acquisition of the freehold once final staircasing has been achieved.
• Home finance house leases providing funding for a purchase where there is an obligation for the homeowner to acquire the funder’s interest after a specified period are also allowed.
• Extensions of existing house leases are permitted in some circumstances
• Where a lease falls into a permitted exception, the seller must serve a warning notice on the proposed buyer to advise that sale on a leasehold basis is permitted and the buyer is required to acknowledge receipt.
• There will be a new prescribed clause to be included in leases to state that the lease is a permitted lease. If a new house lease does not contain this statement, then the land registry will enter a restriction on the title preventing any dealing with the title, other than a charge.
• If a long lease of a house is granted which is not a permitted lease, the leaseholder is entitled to acquire the freehold and any superior leasehold interests for no consideration.
• Where houses are being built it will be important to establish whether they are “houses” within the meaning of the Act. Section 5 suggests that, for example, terraced houses with a single roof structure or above a basement car park will not be “houses” for the purposes of the Act and should not be marketed as houses.

Leasehold Enfranchisement and Extension

• Under the Act there will no longer be a two-year qualifying period before enfranchisement and extension claims can be made, and restrictions on repeated claims are also removed.
• The permitted non-residential element in a building on enfranchisement is increased from 25% to 50%.
• The new term to be granted on lease extensions is 990 years – increased from an additional 50 years for houses and 90 years for flats.
• Shared ownership leases are not excluded. This means the lease term under old model leases can be extended to the length of the term under the new model. There could be a large number of claims when these provisions come into force.
• The Act contains provisions as to how premiums are to be calculated, with specific provisions relating to shared ownership leases, where specified rent continues to be payable on the unowned share.
• The premium will be based on market value and other compensation which is due. Marriage value which increases the level of premium for leases with less than 80 years to run under current statutory lease extension rules will be removed by the Act. There will also be new valuation rules which may reduce premiums.
• Landlords will no longer be able to require leaseholders to meet their legal and valuation costs, except in limited circumstances on failed claims, and cannot require payment of sums as security for costs.
• There will be older developments with large numbers of shorter leases where there is now an opportunity to prepare for a large volume of claims and perhaps to engage with leaseholders in advance of implementation. With an arguably more straightforward legal structure in place, it will be important for landlords to have robust streamlined processes to deal with claims.

Ground Rents

• In recent years ground rents had become an important investment for pension funds and other investors. Residential leases granted over the past 25 years or so may contain rents with increases which are index linked or double periodically. These are now often not acceptable to lenders, but, although it was proposed, existing ground rents have not been abolished by the Act.
• There are ways to remove ground rents from leases. A statutory lease extension of a flat would involve the payment of a premium for an extended term with a peppercorn rent under existing legislation.
• The extension of houses leases under current legislation is on the basis that there will be ground rent. Under the Act, house lease extensions will be brought into line with flats and include a peppercorn rent.
• What is also new in the Act is a right for a leaseholder to request that their rent is reduced to a peppercorn. A premium will be payable to do this, but it is a right which can be utilised in circumstances where the leaseholder does not require or cannot afford the premium to extend the term or has already done so voluntarily and the ground rent has been retained. This right applies to both houses and flats.
• Shared owners are excluded from this right in relation to the specified rent payable for the unowned share of their property but can apply in relation to any ground rent reserved in the shared ownership lease.
• Once a lease extension or enfranchisement process is underway, an application to vary the rent cannot be made.

Service Charges and Rentcharges

Some of the most significant changes in the Act relate to service charges for freehold properties, which are not currently regulated. The Act provides for procedures equivalent to processes under s20 of the Landlord and Tenant Act 1985 for leaseholds. Secondary legislation will be required which will set out more detail as to provision of service charge information, consultation and the possibility of a challenge. The aim is transparency so that freehold owners are aware of what they are being charged for and when charges will be made. Charges must be reasonable and set out clearly both at the estimate stage and in final accounts.

Housing associations will need to take account of the new requirements on developments where they have houses, and also need to be clear about their rights on s106 schemes where they own a number of houses on a private developer’s estate.

There are also some changes to the remedies for enforcement of rentcharge arrears.

Conclusion

Parts of the Act relating to rentcharges, and also some amendments to the Building Safety Act 2022 are already in force.

It is not known when the other provisions of Act will come into force. For housing associations who have not previously dealt with statutory claims, this is the time to get processes set up and to gain an understanding of timelines, such as when counter-notices need to be served, and requirements as to valuations, so as to be ready to start dealing with claims once these provisions come into force. We can help you with this – please do contact us.