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The Leasehold and Freehold Reform Act 2024 has washed up. What does it mean?

On Friday 24th May 2024 the Leasehold and Freehold Reform Act 2024 (“LAFRA”) was given Royal Assent during what is known as the “wash up” and the last parliamentary session of Sunak’s Conservative Government. It follows the Law Commission’s consultation (which started in 2018) which recommended fundamental changes to the valuation methodology and the legal process with a view to making it cheaper and easier for leaseholders to extend their leases and buy their freeholds.

What’s in LAFRA

There’s certainly potential to improve the situation for leaseholders in LAFRA. The relatively uncontroversial improved positions (which are yet to come into force even though the law is now on the statute books) are:

1. Leases are to be extended to 990 years compared to the current 90 years (albeit in valuation terms that is little improvement) (S.32 of LAFRA);

2. Two-year ownership rule to qualify to extend a lease has been removed which will take the pressure off having to decide to extend the lease immediately when you buy a flat (or begin the process of selling) as is currently the case (S.26 of LAFRA) and removal of the prohibition to make repeated freehold and lease extension claims (S.27 of LAFRA);

3. The current non residential threshold to qualify to buy the freehold in a building and taking over the right to manage has been raised from 25% to 50% (S.28 of LAFRA). This will allow significantly more buildings to qualify and enable the freeholds to be purchased and management rights acquired. Just take a look down a typical high street with one shop and two flats above. Currently such a building cannot buy its freehold whereas under the new law the likelihood is that it can;

4. In collective freehold purchases, the participating flats can elect for the Landlord to retain the value in any non-participant flats or commercial areas (S.31 of LAFRA). This means that practically it will be far easier for large buildings to acquire the freehold knowing the participants will not have to fund the shortfall created by non participating flats or say buildings where the landlord has not granted a long lease of their flat (currently the leaseholders would have to buy the Landlord’s flat at near market value which is prohibitive in most cases we have seen);

5. Landlords are to pay their own costs except in low-value claims (such premium and amount to be set by Statutory Instruments) and on failed claims (s.38 of LAFRA), no doubt aimed in part to assist Local Authorities to deal with the legal fees associated with their large portfolios of Right to Buy flats that are in need of extension. This is significant since typically Landlords’ legal costs for lease extensions out weigh the leaseholders costs especially when they use expensive City law firms. Also it shall free up a considerable amount of Tribunal time in being involved where such fees are disputed.

In addition to the above and perhaps the most fundamental part to LAFRA is the change to valuation.

Will the premiums for lease extensions and freehold purchases be cheaper?

The headline under LAFRA is that marriage value no longer has to be paid. This is in part why it was described in the debate surrounding the Act as a significant transfer of wealth from landlords to leaseholders. This is a substantial proportion of the premium payable when extending a lease or buying a freehold which under the previous law (which still applies!) is payable when the lease term falls under 80 years.

All good so far however lurking in LAFRA is a part which will either further reduce the premium payable for lease extensions and freeholds or be used as a potential balancing act in favour of Landlords and increase the price.

The issue is that the Secretary of State has the power to pass secondary legislation to prescribe “deferment rates” (currently 5% for flats and 4.75% for houses) and “capitalisation rates” (the discount rate applied to loss of ground rent income to a Landlord). Reducing the deferment or capitalisation rate would then increase the premium and vice versa.

The problem is that we do not know yet when such secondary legislation shall be brought in, what those rates will be and therefore what impact they shall have on the premiums payable. The rates shall be “market rates” reviewed every 10 years. The only clear upside either way would be that certainty would be introduced.

Therefore whilst the removal of marriage value will reduce the price to extend  a lease or buy the freehold for any leases under 80 years, any reduction of the deferment or capitalisation rate by secondary legislation may then increase that part of the premium calculation. If this is the case then leases with over 80 years could end up being more expensive. Increasing premiums would of course go against the spirit of the legislation which was to make lease extensions and freehold purchases cheaper. However with so many competing issues at play (such as threatened litigation against the Government from Landlords) it would be naive to readily dismiss this risk with some Government advisors on record arguing for a significantly lower deferment rate.

A further point is that whilst LAFRA did not abolish or cap ground rents which the majority of the leaseholder campaigns advocated for, it does cap ground rent for valuation purposes when extending a lease or buying the freehold. A notional cap on the ground rent has been introduced at 0.1% of the freehold vacant possession value of the property. There are some get out clauses for a landlord but generally speaking this would lower the premium for a leaseholder who has a lease with onerous ground rent provisions.   

 When will LAFRA come into effect?

 New Section 123 of LAFRA states as follows:

123 Commencement

(1) This Part comes into force on the day on which this Act is passed.

(2) The following provisions come into force at the end of the period of two

months beginning with the day on which this Act is passed—

(a) section 111 (regulation of remedies for rentcharge arrears);

(b) section 115 (recovery of legal costs etc through service charge);

(c) section 116 (repeal of section 125 of the BSA 2022);

(d) section 117 (higher-risk and relevant buildings: notifications in connection with insolvency).

(3) The other provisions of this Act come into force on such day or days as the Secretary of State may by regulations appoint.

(4) The Secretary of State may by regulations make transitional or saving provision in connection with the coming into force of any provision of this Act.

(5) The power to make regulations under this section includes power to make different provision for different purposes.

(6) Regulations under this section are to be made by statutory instrument.

So therefore, the main points discussed above are not yet law despite LAFRA receiving Royal Assent. The operative provisions do not come into force until commencement which is to be undertaken by statutory instruments.

As to when the statutory instruments will be passed, timing is anyone’s guess. The only clue is that during the debate in the House of Lords, it was said that the anticipated timescale will be 2025-2026. It therefore appears that any significant changes to the valuation shall not be immediate but who knows what a new Government may (or may not) prioritise.

What should I do now?

We know what LAFRA includes and the potential benefits but some of the fundamental rates are unknown and the timings are up in the air for the operative parts of the legislation. Unfortunately whilst the passing of LAFRA is a significant step closer to the new world, we are not quite there yet.

If you have reasons to delay in the hope of saving marriage value, you are aware of the risks of delaying and have no reason to extend just yet, you might wish to continue to wait and see. However if your lease is over 80 years and you are considering an extension or buying your freehold, you might wish to continue – whilst you may not have to contribute towards the landlord’s costs under LAFRA, there is a risk that the premium may not be reduced for you so any potential savings on costs could be outweighed, but of course, we cannot say for sure.

Making a decision in this constantly moving landscape remains a difficult task and now only slightly less so that there is a potentially good but currently wishy washy (in parts) law to contemplate – for now.  

About the Author
James Compton, Partner, Head of Enfranchisement

Specialises in: Real Estate Projects, Leasehold Property, Property Management, Company Commercial, Social Housing and Local Authority 

If you are looking for help and advice, or would like to talk to someone at Comptons, please contact James Compton in the Leasehold Property department at Comptons Solicitors LLP. ( / 020 7482 9513).