Leasehold Reform 2024: How and When will the Changes Affect you?

Posted by Connect UK Sales & Acquisitions on 16th June 2024 -

The Leasehold and Freehold Reform Act 2024 was one of the final pieces of legislation to be passed before the prorogation of Parliament on Friday, May 24^th, 2024.

When will the legislation become law?

Royal Assent has been granted, however, this does not constitute the law’s enforcement, and we currently have no expected date of introduction.

The parts of the Act that amend the Building Safety Act 2022, and deal with rent charge arrears, will become law on 24 July 2024. The remainder, which we will look at below, has no set date, and will be introduced by the Secretary of State using statutory instrument.

The legislation states that: “The other provisions of this Act come into force on such day or days as the Secretary of State may by regulations appoint”
The Impact Assessment indicates that the changes could not take effect until 2025/26, with the totality of the legislation coming in as late as 2028.

What changes will the reform make?

1. Abolition of Marriage Value in houses and flats with short leases;marriage value will no longer be shared with your freeholder once this legislation is passed.
2. Capping of ground rents (when extending the lease); the legislation caps ground rent at 0.1% of the property’s value.
3. Standardisation of lease extension charges; The rates and percentages used to calculate the cost of a lease extension will be determined by the Government (as opposed to the two parties) using standardised rates. This should theoretically bring the cost of extending a lease down.
4. Changing standard lease extension term to 990 years; This replaces the current typical lease extension terms of 90 years (flats) and 50 years (houses).
5. Removal of two-year ownership rule; Under current legislation, leaseholders must have occupied their leased property for two years before they can make changes to it, such as extending the lease or purchasing the freehold. This stipulation will no longer apply to all leases under this new legislation.
6. Abolition of leasehold houses; Demand and uptake for leasehold houses had been declining dropping from a reported 15% in 2016 to <1% in 2022, the reform act will prevent the sale of new leasehold houses.
7. Share of professional fees associated with lease extensions; Currently, when a leaseholder extends their lease, they must cover their freeholder’s legal and valuation costs, this change would result in a drop in professional fees payable by the leaseholder when extending their lease.
8. Purchase ground rent without having to extend lease term; This legislation allows those leaseholders who already have long leases to simply buy out the ground rent – if they have over 150 years remaining.

Changes that will not become law:

There were some noticeable absences in the bill’s current form, let’s take a look at the changes that did not make the cut:

i) Capping of ground rent (existing leases); the Government had previously expressed interest in capping ground rent to a ‘peppercorn’, but earlier this year it was discovered that the Government was no longer pursuing this cap, likely due to mass lobbying by freeholders. A cap of £250 was subsequently mentioned, however, this cap’s absence in the final bill indicates its abandonment.

ii) Removal of leasehold system; the abolition of the leasehold system was something indicated by Housing Secretary Micheal Gove in early 2023 when he stated that he’d like to abolish the leasehold system. Due to the reforms set out in this bill, and the millions of leasehold engagements effective in the current property market, it’s unlikely that leasehold will be abolished anytime soon.

iii)   Lease forfeiture; circumstances permitting, if a leaseholder breaches their lease under current legislation, it can be ‘forfeited’ back to the freeholder, with no equity being owed to the leaseholder. The prevention of this archaic feature of the leasehold system was met with general support, although, it was not included in the bill.

All in all, the changes outlined in the bill’s current form are likely to bring some more stability and viability to the leasehold system. However, it’s worth noting that the changes set out in the bill in its current form will not come into effect until 2025/26, with some arriving as late as 2028.