The Leasehold and Freehold Reform Act 2024 Explained

The Leasehold and Freehold Reform Act is now part of UK law, but how will it affect the UK property market? Here I will break down the main changes brought about by this Act and what landlords and property investors need to know, including the latest news on leasehold reform, ground rent clauses, lease extensions, collective enfranchisement, and more.

Table of Contents

What Does Leasehold Mean?
What is The Leasehold and Freehold Reform Act?
Does The Leasehold and Freehold Reform Act 2024 Cap Ground Rent?
Leaseholds for Flats – Collective Enfranchisement
Lease Extensions Under the Leasehold Reform Act

What Does Leasehold Mean?

Leasehold means that the buyer only owns the property for a fixed period, after which time it reverts to the landlord or freeholder. Many flats or apartments are leasehold properties and the freeholder is the owner of the entire building. Some houses can be leasehold properties too. Leaseholders pay ground rent to the freeholder every year. They may also need to pay service charges to the freeholder which covers maintenance of communal areas or outdoor areas of the property, e.g. maintenance of lifts in a block of flats. Freeholders can also benefit from ‘marriage value’ whereby the property’s value increases following an extension of the lease. The landlord or freeholder could demand 50% of the increased property value, further increasing costs for leaseholders.

What is The Leasehold and Freehold Reform Act?

The Law Commission, as instructed by the UK government, conducted a review of leasehold laws in 2017. This review revealed that leasehold laws created a potentially unfair environment for owners of leasehold properties. Costs to extend leases were disproportionately high, selling a leasehold property was difficult, and there was no cap on ground rents or associated fees. This represented an imbalance between freeholders and leaseholders, leading to a much-needed reform of the leasehold system.

The Leasehold and Freehold Reform Act 2024 gives more rights and protections to UK homeowners, including making it easier and cheaper for leaseholders to buy their freehold or extend their lease, abolishing marriage value, scrapping the requirement for leaseholders to have owned their property for 2 years before they can buy or extend the lease, extending standard lease extension terms to 990 years, banning excessive building insurance commissions for freeholders and managing agents and providing more transparency over service charges. The Act also bans the sale of new leasehold houses, apart from in exceptional circumstances.

The Act received Royal Assent on May 24th, 2024, meaning it has now officially passed into law, although it will not come into effect immediately. The King’s Speech on July 17th 2024 also promised further protections for homeowners in the form of a planned Leasehold and Commonhold Reform Bill, which will likely be introduced to Parliament in late 2025.

Does The Leasehold and Freehold Reform Act 2024 Cap Ground Rent?

Prior to the Leasehold Reform Bill, leaseholders frequently had to pay ground rent to the landlord or freeholder. In the past, ground rents were a nominal amount and not a significant sum of money. Recently, some ground rents have risen significantly, meaning that leasehold property owners had to pay a disproportionately large amount and had problems selling their property due to high ground rents.

The Leasehold Reform (Ground Rent) Act 2022 originally had planned to reduce ground rent to a peppercorn, referencing an older law that described a symbolic payment of a nominal sum. Following the UK’s general election in July, the law was passed quickly during the government’s washup period and the peppercorn rent or any ground rent cap was not included. The Leasehold and Freehold Reform Act 2024 also does not cap ground rents, although the current government vows to tackle this issue in future legislation.

Ready To Build Job Replacing Income With Property?

Leaseholds for Flats – Collective Enfranchisement

Some leaseholders who own flats in a building can collectively purchase the freehold of the building. This gives the flat owners more control over the building and stops freeholders from charging extortionate ground rent and service charges. This is known as freehold enfranchisement or collective enfranchisement. The Leasehold and Freehold Reform Act makes it cheaper and easier for leaseholders to do this, as they would no longer have to pay freeholder’s costs. Some leaseholders also take over the management of their building without buying the freehold using the Right To Manage. Buying the freehold and enacting the Right To Manage used to require that at least 75% of the building must be residential, but under the new Leasehold Reform Act, the building can be 50% commercial floor space.

Lease Extensions Under the Leasehold Reform Act

Leaseholders have always had the option to buy their freehold, meaning they no longer have to pay ground rent and they own their property forever. They can also extend their lease, which increases their property value, making it easier to sell or obtain a mortgage. The Leasehold Reform Act makes it cheaper and easier for homeowners to buy their freehold or extend their lease, offering much longer lease terms. Previously, homeowners had to own their home for at least two years before they could extend the lease or buy their freehold. The Act also removes landlords’ entitlement to legal costs relating to lease extensions, making it a more appealing option to leaseholders.

Some leaseholders may find that the Act makes it more expensive to buy their freehold, depending on how many years are left on the lease. If there are less than 80 years left on the lease or the ground rent is less than 0.1% of the property value, the lease extension will be cheaper under the Leasehold Reform Act. If there are more than 80 years left on the lease, it could be more expensive to extend the lease. The Act does not currently specify the rates at which freehold and lease extension purchase prices are calculated – if they are set at a lower rate, the cost of lease extensions could go up. As the Act is not yet in effect, it is hard to say at the time of writing (October 2024) whether it is worth it for homeowners with a lease longer than 80 years to extend their lease.

Stay up to date with all the latest developments in property investment and gain valuable insights from experts with one of Assets For Life’s FREE property events – sign up or learn more by clicking the link below.