Leasehold and Freehold Reform Act 2024

Policy background

Leasehold houses

6. Over recent decades, England and Wales have witnessed developers selling new houses with a lease which could have been sold freehold. In many cases, consumers were often not aware of what owning a house on a lease would involve.
7. The Government announced on 21st December 2017 it would ban the practice, and changes to Help to Buy, and the Leasehold reform (Ground Rent) Act 2022 have already made steps to reduce the prevalence of new leasehold houses coming onto the market. Government consulted twice on details of the ban, including which sites and individual units would qualify for an exemption (please refer to the ‘Related documents’ section for the links).
8. These measures put a restriction on the grant of a new long lease of a house on a legislative footing.
9. From the point of commencement, under provisions in the Act all new houses have to be sold as freehold, unless the seller can demonstrate they are a ‘permitted lease’. The permitted leases are included in Schedule 1.
10. Where vendors, mostly new house developers, are proposing to sell a permitted lease, provisions in the Act require them to be explicit during the marketing and sale process that they are selling a leasehold house and clearly evidence why the lease is permitted.
11. Specifically, the restrictions require the following steps:
    1. Step 1: Marketing: If a developer is advertising a new lease on a house, they need to declare it as part of standard ‘permitted lease information’ in their marketing. If they do not, they can be subject to a financial penalty.
    2. Step 2: Pre-sale: 7 days before the lease is granted (or an agreement for lease is entered into), the developer needs to provide a ‘warning notice’ to the buyer, setting out what qualifies the house as a ‘permitted lease’. If they do not, they can be subject to a financial penalty.
    3. Step 3: Registration: All new long leases need to include a declaration of compliance on the cover and within the lease, stating whether it is either a ‘permitted lease’, or is not a long residential lease of a house. If this declaration is not included, the property can be restricted from re-sale until compliance is clarified. This is to protect future buyers from purchasing a prohibited lease.
    4. For site-wide permitted leases (listed in Schedule 1 Part 1), there is an additional consumer protection. Prior to Step 1, developers need to apply to the appropriate tribunal for a certificate that the proposed leasehold house is exempt. If they do not, they can be subject to a financial penalty.
12. Failure to comply with the restrictions could result in a fine ranging from £500 - £30,000 per infraction. The government will appoint a lead enforcement authority to investigate and enforce infractions of the ban, but enforcement action can be taken by all local weights and measures authorities.
13. If a buyer is mis-sold (i.e. house was not a permitted lease), under provisions in the Act they are entitled to compel the seller to covey the freehold to them for free and to pay their legal costs.

Leasehold enfranchisement

14. Generally, homeownership in England and Wales consists of two tenure types: freehold and leasehold. Freehold is ownership over the land and the property built upon it, which lasts forever, and generally gives extensive control over the property. Leasehold provides time-limited ownership (for example, a 99-year lease), and control of the property, which is shared with, and limited by the landlord. Unless a leaseholder extends their lease, the property will revert to the landlord, and ultimately the freeholder. The balance of power between leasehold owners and their landlord (who may or may not also be the freeholder) is governed by the terms of the lease and by legislation. The residential leasehold sector represents one in five (4.98 million properties) of the English housing stock and one in six in Wales (approximately 235,000).
15. Qualifying leaseholders have statutory rights to extend their lease or buy the freehold (either individually for houses, or collectively with fellow leaseholders for blocks of flats). The process of extending a lease or buying the freehold is often referred to as enfranchisement. When a leaseholder exercises their right to extend their lease or buy the freehold, they must pay a price to their landlords (except for lease extensions of houses, where a ‘modern ground rent’ is paid instead). In addition, leaseholders in a building may have the right to take over its management without buying the freehold (which is known as the right to manage, or "RTM"), or to seek the appointment of a new manager.
16. In the leasehold system, the ownership structures can be complex. In addition to freeholders, intermediate landlords and managing agents also play a role. For example, where one is appointed, it is a managing agent's job to manage the property in accordance with the terms of the lease and statutory requirements on behalf of the landlord. Sometimes there might be a chain of leases in a building, sitting like rungs on a ladder, with a freeholder at the top, leaseholders (such as those qualifying for enfranchisement rights) at the other end, and one or more leases - called "intermediate leases" - in-between. There might also be leases that do not act as landlords to leaseholders, for example ones covering the common parts.
17. Until recently, landlords could sell a new lease on a property subject to an ongoing obligation to pay a ground rent. A ground rent is a regular payment which a leaseholder must make to their landlord, which is unconnected with any services that the landlord might provide (for example, building maintenance). From 30 June 2022, the Leasehold Reform (Ground Rent) Act 2022 prohibited the charging of a financial ground rent for most new regulated leases. However, the 2022 Act did not alter the position for existing leaseholders. Ground rents, and any potential increases through rent review provisions set out in the lease, are factored into the calculation of the price for lease extension and freehold acquisition claims. After a statutory lease extension of a flat, the leaseholder is only liable to pay a peppercorn ground rent, whereas in a lease extension of a house, a financial ground rent is due.
18. Most houses are sold as freehold, although an increasing number of freehold homeowners live on estates ("freehold estates") where the communal areas are owned, paid for and maintained privately, rather than by the local authority. Freehold homeowners are required to contribute towards the maintenance of the shared areas through payment of an estate rentcharge or equivalent contribution. There are an estimated 20,000 freehold estates in England.

Qualifying criteria

19. The Act removes the requirement for the leaseholder of a flat to have owned their property for at least two years before they can extend their lease, and the leaseholder of a house to have owned their property for at least two years before they can extend their lease or buy their freehold. The Act allows leaseholders of flats to extend their lease, and leaseholders of houses to extend their lease or buy their freehold, immediately upon taking ownership of a lease.
20. The Act increases the ‘non-residential limit’ to 50% for collective enfranchisement and the right to manage. The ‘non-residential limit’ restricts leaseholders’ access to collective enfranchisement and the right to manage based on the proportion of the building's floor space that is used for non-residential purposes. The Act gives leaseholders the right to collectively enfranchise or claim a right to manage in buildings where up to 50% of the floorspace (excluding common parts) is used, or intended to be used, for non-residential purposes which represents an increase from the current 25% limit.

Lease extensions and ground rent

21. The Act introduces a new right to a lease extension for leaseholders of both houses and flats, for a term of 990 years at a peppercorn ground rent on payment of the statutory price. The Act also gives shared ownership leaseholders the right to a lease extension for 990 years.
22. The Act amends statutory redevelopment break rights to give freeholders consistent rights for houses and flats. Break rights will be available during the last 12 months of the original lease or the last five years of each period of 90 years of a 990-year lease extension.
23. The Act repeals a limited number of statutory redevelopment ‘defences’ (or blockers) to lease extension (as well as some freehold acquisition claims) in houses and flats, where the rights have become redundant, or in certain cases for houses, compensation rules are incompatible with the new 990-year lease extension rights.
24. The Act introduces a new right for leaseholders who already have very long leases (with over 150 years remaining) to buy out their ground rent without also needing to extend the term of their lease or buy the freehold. Leaseholders already have the right to buy out their ground rent as part of the lease extension process, and leaseholders with under 150 years on their lease will continue to be able to do this. The Act sets the method for calculating the price of a statutory lease extension or freehold acquisition, known as the valuation process. The Act removes the requirement for marriage value to be paid, caps the treatment of ground rents in the valuation calculation at 0.1% of the freehold value and allows Government to prescribe the rates used to calculate the price of enfranchisement. Rates will be set by the Secretary of State in secondary legislation.

Intermediate leases

25. Intermediate leases are a feature in many blocks of flats but can also be found in leasehold houses. Where intermediate leases are present, the Act treats those interests as merged into the freehold for the purposes of determining the price a leaseholder must pay. This simplifies the valuation process for leaseholders, and in many cases reduces the price payable and reduce their costs.
26. The Act introduces a new right for an intermediate landlord to reduce the rents that they pay where a ground rent is reduced to a peppercorn following a lease extension or ground rent buyout claim. In collective enfranchisements, the Act introduces a right for leaseholders to leave in place the parts of intermediate leases that are superior to leaseholders who qualify for enfranchisement, but do not participate in the claim. The Act also introduces certain protections for intermediate landlords and extends the right to a lease extension to certain sublessees.

Mandatory leasebacks and jurisdiction

27. The Act establishes a new right for leaseholders to require their landlord to take a 'leaseback' of any unit that is not let to a participating tenant (which includes commercial units). Leasebacks are 999-year leases (at a peppercorn rent) given to the former freeholder following a collective enfranchisement claim. If there is an existing lease of the unit (e.g. a sitting commercial tenant) the former freeholder, having received a leaseback, becomes an intermediate leaseholder and therefore continues to be the landlord of that unit, and receives any rent payable by the tenant. The leaseholders participating in the collective enfranchisement claim benefit because the value of the unit is removed from the price they must pay for the freehold. Under the current law, in some circumstances, a freeholder can require the leaseholders who are pursuing a collective enfranchisement claim against them to grant them a ‘leaseback’ of any unit that is not let to a qualifying tenant (leaseholder). The Act gives leaseholders an equivalent right for any non-participating units.
28. The Act sets a new costs regime for enfranchisement and right to manage claims. Leaseholders who are extending their lease, buying their freehold or exercising their right to manage will no longer generally pay the landlord’s costs of dealing with the claim (such as valuation, conveyancing and legal fees). Each party will generally bear their own costs.
29. The Act amends the jurisdiction for enfranchisement and right to manage disputes, so that as far as possible all disputes will be determined by the Tribunal. Again, in most cases each party will pay their own litigation costs.

Transparency of service charges and administration charges

30. Most leaseholders and some tenants, particularly assured tenants of social housing landlords, are required to pay a service charge to their landlord in return for services carried out to manage, maintain, repair, insure and, in some cases, improve their building (commonly known as "management functions"). For assured tenants, they will only pay for services carried out to manage and maintain the building and will not be responsible for the payment of charges to repair, insure or improve the building. Details - for example on the way service charges are to be organised, what landlord may or may not be charged for, the proportion of the overall change individual leaseholders must pay, and the frequency of payment - are set out in individual leases.
31. Leaseholders and tenants who pay a variable service charge have some protection. Under Section 19 and 27A of the 1985 Act, variable service charges must be reasonably incurred and, where costs relate to work or services, those works or services must be of a reasonable standard. Leaseholders and tenants may challenge the reasonableness of the service charge by making an application to the appropriate tribunal (the First-tier Tribunal (Property Chamber) in England and the Leasehold Valuation Tribunal in Wales) who can make a legal determination on the reasonableness of the service charge. There are also two Government approved codes of practice – Royal Institution of Chartered Surveyors Code of Practice 1 , and the Association of Retirement Housing Managers Code of Practice 2 - which outline best practice for managing agents, landlords or other relevant parties in relation to residential leasehold property management. Both documents can be taken into account as evidence at court and First-tier Tribunal hearings, including hearings on the reasonableness of service charges.
32. Those leaseholders and tenants who pay a variable service charge also have other rights. For example, the demand must contain an address in England or Wales which can be used to send notices to the landlord. The landlord must demand the service charge within 18 months of the relevant costs having been incurred or provide notice in writing that those costs have been incurred and that the leaseholder or tenant will subsequently be required to contribute to them by the payment of a service charge. Leaseholders and tenants may ask for a summary of the service charge account for the last accounting year or, if accounts are not kept by accounting years, the past 12 months. Leaseholders and tenants also have the right to inspect documents relating to the service charge to provide more detail on the summary.
33. The measures in the Act seek to drive up the transparency of financial and non-financial information that leaseholders and tenants receive. This includes how service charge costs are presented; the provision of key information – such as insurance costs; greater financial information through the annual preparation of written statements of account; and the ability to compel landlords to provide other relevant information that the tenant needs to know as an occupier of a building where a service charge is payable. Some of these measures will be extended to those who currently pay fixed service charges.
34. Another charge most leaseholders and some tenants may be liable to pay is a variable administration charge. The lease or tenancy governs the situations where a variable administration charge may be payable and include, for example, obtaining permission to carry out alterations to the flat, or payment of the landlord’s legal fees incurred incidental to any action taken in respect of non-payment of rent and service charge or for other alleged breaches of the agreement.
35. Variable administration charges are subject to a statutory limitation that any charge is payable only to the extent that the amount of the charge is reasonable, and again the reasonableness of the charge may be challenged through an application to the appropriate tribunal. Landlords have discretion, albeit not unfettered, as to the amount that is payable. Leaseholders and tenants may be aware that a cost may be payable, but do not know in advance how much these fees will be. The measures in the Act seek to drive up the transparency of administration charges that leaseholders and tenants may face.

Buildings insurance

36. Most leaseholders are obliged to maintain buildings insurance as part of their mortgage. It is normal, especially in the context of residential multi-occupancy buildings, for the freeholder/landlord (or property agent if they are acting on their behalf) to reserve the right in the lease to place and manage the insurance of the building and recover the cost of the premium either as a separate insurance rent or as part of the service charge.
37. The Secretary of State asked the Financial Conduct Authority (FCA) to review the residential multi-occupancy building insurance market because of dramatic premium increases. In 2022, the FCA published a report 3 that found over the period 2016-2021, premiums for residential multi-occupancy buildings had increased by 187% for buildings which had flammable cladding, and 94% for buildings without flammable cladding.
38. The FCA followed up with a report 4 in 2023 that found that commissions were often at least 30% of the total insurance premium, with some commissions being over 50%. In many cases brokers have shared significant proportions of these commissions with landlords, freeholders and property managing agents with limited evidence of the value provided for this commission sharing.
39. Under existing legislation, leaseholders do not have to be made aware of the level of any commission being taken throughout the value chain, which gives intermediaries the opportunity to take substantial commissions without needing to demonstrate the reasonableness of the costs. This arrangement may incentivise lessors or those working on their behalf, to maximise their own remuneration as opposed to choosing the best value.
40. The measures in the Act prohibit commissions from the placer/manager of insurance from being recovered from leaseholders through their service charge. These commissions are replaced by a transparent handling fee system where those placing or managing insurance can charge for their work, for example, if they are handling claims on behalf of leaseholders. The intent is that the cost reflect the work and time undertaken to carry out the work; both, to understand the basis of the fee and to make it more easily challengeable if considered by the leaseholder as being unreasonable.

Rebalancing the legal costs regime

41. Under the terms of a lease, leaseholders may be liable to pay the legal costs of their landlord, regardless of the outcome before the relevant court or tribunal. Currently, leaseholders must apply to the relevant court or tribunal to limit their liability to pay their landlord’s legal costs recovered either through the service charge or as an administration charge. In addition, leaseholders are only able to claim their own legal costs from their landlord under very limited circumstances. This may deter some leaseholders from bringing challenge.
42. The Government announced 5 its commitment to ensuring leaseholders are not subject to any unjustified legal costs and can claim their own legal costs from their landlord if appropriate.
43. The measures in the Act flip the requirement that leaseholders have to apply to limit their liability for their landlord’s legal costs, and instead require landlords to apply to the relevant court or tribunal to pass any or all of their legal costs on to leaseholders as an administration charge; or on to participant and non-participant leaseholders through the service charge. The relevant court or tribunal will make a decision on applications that is just and equitable in the circumstances. An implied term in all leases gives leaseholders a new right to apply to claim their legal costs from their landlord. The relevant court or tribunal will make a decision on applications that is just and equitable in the circumstances.

Leasehold and freehold sales information

44. To sell a leasehold property or a property on a managed estate, a leaseholder or homeowner requires certain information about their property (e.g. level of ground rent and service charges, legal obligations or the level of estate management charges) and must request this from their landlord or estate manager. Currently, there is no statutory requirement for landlords or estate managers to respond to such information requests within a set time limit or provide the information at a reasonable cost. Some landlords and estate managers therefore take weeks or months to provide information; holding up the sales process and causing sales to fall through. Others set significant fees for providing this information, leaving leaseholders and homeowners with little option but to pay if they want to sell their home. The process is governed by custom and the market, and despite extensive engagement with industry, action to improve best practice on this matter has not been forthcoming and the Government believes it must therefore intervene to regulate.
45. Around 1 in 3 of all sales fall through after the offer has been placed. Fall-throughs can result in thousands of pounds of losses in each case and cumulatively cost consumers £400m per year. Approximately 260,000 leasehold transactions take place annually. In over half of cases, leasehold information is not received by the leaseholder until more than 30 days after payment is made.
46. The Act seeks to support leaseholders and homeowners by removing unnecessary delays to the homebuying and selling process by setting a maximum time and fee for the provision of information required by a leaseholder from their freeholder or by a homeowner from their estate manager.

Regulation of estate management

47. There is a growing number of households in England who live on private or mixed-tenure estates where, on completion of a development, they – rather than the local authority – are required to pay for the maintenance of communal areas and facilities. This can include payments for servicing of private roads, external lighting, play areas for children or electric gates. The provision of these services is undertaken either through a private or resident-led Estate Management Company, and the liability for contributions towards maintenance of communal areas and facilities is usually defined in the deed of conveyance or the rentcharge deed.
48. Homeowners on these estates have extremely limited rights over the quality of services provided. There is currently no regulatory framework to protect homeowners from excessive costs or poor quality work – and homeowners currently have no statutory rights to challenge their estate management provider when there has been a failure to provide a reasonable service or when an unreasonable charge has been levied. The Government made a public commitment in December 2017 6 to give freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed-use estate the ability to access equivalent rights as leaseholders to challenge the reasonableness of service charges. It also made a commitment in June 2019 7 to give homeowners on these estates the right to appoint a new manager to manage the provision of services where there is a serious management failure.
49. The provisions in the Act seek to give homeowners living on managed estates a number of new rights to make it easier to hold estate management companies to account. This includes the ability to challenge the reasonableness of the charges they pay. It also includes similar rights to leaseholders that are being proposed in the Act around greater transparency of information over their costs and the ability to obtain other information. There is provision for a system of civil penalties, which applies to an estate management provider, who fails to comply with requirements in respect of the provision of information, inspecting of accounts or insurance. The Act also gives homeowners the right to apply to the relevant tribunal for the appointment of a substitute manager to manage the provision of services instead of an estate management company.
50. Homeowners on managed estates, like many leaseholders and tenants, are also subject to various administration charges for which they have no control or protection. These may be payable for issues such as variation of the deed of the property, handling requests for information or costs of non-payment of estate management charges. The measures in the Act create a new regulatory framework around administration charges. They require all administration charges to be reasonable and give homeowners the right to challenge the reasonableness of the charges by making an application to the First-tier Tribunal in England (and the Leasehold Valuation Tribunal in Wales). The Act also includes measures to ensure that homeowners are provided with better information about the amount of the administration fee they are liable to pay.

Redress

51. Currently, property agents (including managing agents) are required by law to belong to one of the following government approved redress schemes: The Property Redress Scheme, or The Property Ombudsman. Social Landlords who are registered with the Regulator for Social Housing (RSH) are required to be members of the Housing Ombudsman Scheme.
52. There is currently a gap in access to redress for leaseholders where their landlord does not employ a managing agent and is not a social landlord but carries out their own property management on their leasehold property. There is also a gap in access to redress for homeowners on freehold estates where the estate management company does not employ a managing agent. In such circumstances, the landlord or estate management company is not required to sign up to a redress scheme.
53. To address the gap in access to redress, the measures in the Act can require landlords and estate management companies who manage their property or estate to sign up to a new mandatory redress scheme.
54. The measures allow for robust enforcement should a relevant landlord or estate management company who is required to join a redress scheme fail to do so. This includes significant financial penalties; and giving homeowners a route to apply to the appropriate tribunal for an order to appoint an alternative manager.

Rentcharges

55. A rentcharge is generally an annual sum of money (other than rent) which is charged on and payable out of land. It can be created by deed, will or codicil, or by statute. Rentcharges were historically used for the purpose of making financial provision for family members or other dependants. However, since the Rentcharges Act 1977, no new income-supported rentcharges of the type mentioned above can be created, and any existing charges will be phased out by 2037.
56. Failure to pay a rentcharge within 40 days of its due date means that under Section 121 of the Law of Property Act 1925, the recipient of the rentcharge (the rentcharge owner) may take possession of the subject premises until the arrears and all costs and expenses are paid, or the rentcharge owner may grant a lease of the subject premises to a trustee that the rentcharge owner may set up themselves. The measures in the Act seek to fulfil a public commitment made in December 2017 so that a rentcharge owner is not able to take possession or grant a lease on the property where the rentcharge remains unpaid for a short period of time.

Building safety

57. The leaseholder protections in the Building Safety Act 2022 came into force on 28 June 2022, with new financial protections for leaseholders in buildings of at least 11 metres or five storeys in height with historical safety defects.  
58. The effect of the Act is that building owners and landlords who built defective buildings of at least 11 metres or at least five storeys, or are associated with those responsible, pay to remedy historical safety defects for both cladding and non-cladding defects.  
59. In the Act, there are six amendments to the Building Safety Act to ensure the leaseholder protections function in the way they were originally intended, and additional protections in some specific scenarios.