The UK’s leasehold system has long been a thorn in the side of homeowners and leaseholders. Issues like unfair costs, opaque processes, and limited rights have created a landscape fraught with challenges. Despite previous attempts to improve the system, such as the Law Commission’s Residential Leasehold and Commonhold Report Residential leasehold and commonhold – Law Commission, meaningful reform has remained elusive — until now. Or so we hope. With the introduction of the Leasehold and Freehold Reform Act 2024 and Labour’s commitment to addressing its flaws, big changes are on the horizon for leaseholders, developers, and property professionals alike. Here’s our take on the key developments and what they could mean for you.
THE LEASEHOLD AND FREEHOLD REFORM ACT 2024: A STEP FORWARD, BUT NOT FAR ENOUGH
While the Leasehold and Freehold Reform Act 2024 sought to tackle issues highlighted by the Law Commission, it’s fair to say it fell short of the mark. Gaps in the legislation and unintended consequences have left many leaseholders and homeowners frustrated. Enter the Labour Government, which has pledged to fix the Act’s shortcomings and deliver a more robust framework for property ownership in the UK.
PROPOSED REFORMS: CLOSING LOOPHOLES AND EXPANDING RIGHTS
Labour’s reform agenda is a good first step. But it’s unclear whether it will be enough to fix years of a broken system. Not all the proposals are new laws – some are corrections of the existing law that they’re planning to implement through secondary legislation to make the changes. They are looking to address everything from valuation loopholes to service charge disputes. Here are some of the standout proposals:
- Fixing the Valuation Loophole: A critical flaw in the 2024 Act allows valuation reforms to extend beyond their intended scope. Undermining the integrity of the system. Labour plans to tighten these rules to restore confidence.
- Supporting Shared Ownership Leaseholders: Tens of thousands of shared ownership leaseholders have been denied the right to extend their leases to 990 years due to landlords lacking sufficiently long leases themselves. Labour aims to rectify this oversight.
- Right-to-Manage (RTM) Reform: While Section 49 of the 2024 Act increased the non-residential floorspace limit for RTM claims from 25% to 50%, freeholders still wield disproportionate power in RTM companies. Labour will amend voting rights to ensure fair representation for leaseholders.
- Abolishing the 2-Year Rule: Effective from January 31st Leaseholders will no longer need to wait two years after purchasing their property to extend their lease or buy their freehold. This change will empower homeowners to take control sooner, though it’s only a small step and many more are needed.
- Challenging Service Charges: Labour plans to strengthen leaseholders’ ability to contest unreasonable service charges. In some circumstances, it’ll be possible to get a tribunal to rule on legal costs before they are passed onto leaseholders.
- Building Insurance Transparency: Already contained within the act under section 59. Labour is looking to fine tune this through secondary legislation to ban commissions for landlords and property managing agents on building insurance. Replacing these with fair, transparent fees.
- Estate Management Charges: Homeowners will gain greater access to information, the right to challenge charges at the First-tier Tribunal, and tribunal powers to appoint substitute managers if necessary.
SECTION 20 REFORM
Improvements to the ‘major works’ procedure will provide better protections for leaseholders facing large bills. It’ll provide greater clarity on:
Ending the Feudal Leasehold System
One of Labour’s most ambitious goals is to end the feudal leasehold system altogether. By acting on the Law Commission’s recommendations and delivering on their manifesto pledges, they aim to make commonhold the default tenure for flats and ban new leasehold houses. A consultation on this is set to take place next year.
The Rise of Commonhold: A New Era for Homeownership
Introduced in 2002, commonhold allows homeowners to own their flats outright while jointly managing communal areas with other residents. Despite its advantages, commonhold never gained traction, thanks to resistance from developers, mortgage lenders, and a general lack of awareness. Labour’s reforms aim to change this by making commonhold the default tenure for new developments, marking a decisive shift away from leasehold arrangements.
WHAT THIS MEANS FOR YOU
Whether you’re a leaseholder, developer, or property professional, these changes will have far-reaching implications. Whether its lenders being hesitant to finance leasehold properties. Which has a knock-on negative impact when it comes to selling leasehold development properties.
Buyers and sellers of leasehold properties can experience delays in transactions due to incomplete or misunderstood information regarding leaseholds. So, here’s what you need to consider in this evolving landscape:
Leaseholders
- Know Your Rights: Stay informed about your rights to extend leases, challenge charges, and claim management rights.
- Act Early: With the abolition of the 2-year rule, leaseholders can take control of their property sooner than before.
Developers and Freeholders
- Restructure Wisely: Align your investments with the proposed reforms to minimise regulatory impacts.
- Preserve Value: Seek strategic advice to restructure interests while preserving as much value as possible.
Property Professionals
- Educate Your Clients: Help buyers, sellers, and investors understand the implications of these reforms.
- Streamline Transactions: Ensure compliance with leasehold reform requirements to avoid delays in property sales.
- Provide strategic advice: when it comes to structuring investments help clients minimise future regulatory impacts.
- Guide leaseholders: particularly when it comes to enfranchisement rights.
THE BIGGER PICTURE
Labour’s proposals represent shift in the UK’s approach to property law. However, it remains to be seen how significant these proposals will actually be when it comes to enactment. By addressing the flaws in the 2024 Act and championing commonhold as the future of homeownership, the Government is laying the groundwork for a fairer, more transparent system.
But it’s not just about laws and policies; it’s about the real-world impact on people’s lives. From enabling smoother transactions to giving homeowners greater control over their properties, these reforms have the potential to transform the UK property market for the better.
So, whether you’re navigating leasehold complexities or gearing up for the commonhold revolution, one thing is clear: change is coming, and it’s time to be ready. If you need help with preparing for the future or managing the current situation, get in touch today.
