Leasehold Reform: what next for the sector?

Following the announcement of the UK General Election on 4 July 2024 both the government and opposition parties agreed that the House of Lords would consider the Leasehold and Freehold Reform Bill before the formal dissolution of parliament. The Bill passed the Lords unopposed and has now gained Royal Assent.

The Act introduces several key changes including:

• Increasing the standard lease extension term for houses and flats to 990 years.
• Lifting of the requirement for leaseholders to have owned the property for at least two years before qualifying for a lease extension or purchase of a freehold.
• Removing ‘marriage value’ from the premium calculation for lease extensions.
• Making it easier and cheaper for leaseholders to extend a lease or buy the freehold.
• Making it easier for leaseholders to take over the management of their building – increasing to 50% the amount of commercial space that would prevent leaseholders from accessing the Right to Manage or the right to collective enfranchisement
• Removing paying for freeholder costs from leaseholders who want to exercise their right to enfranchise. Each party will now pay their own costs.
• Scraping the presumption for leaseholders to pay landlords’ legal costs when challenging poor practice.
• Setting a maximum time and fee for the provision of home buying and selling information.
• Replacing buildings insurance commissions for managing agents, landlords and freeholders with administration fees.
• Ensuring freeholders or managing agents use a standardised format for service charges.
• Requiring freeholders who manage their property to belong to a redress scheme.
• Banning the sale of new leasehold houses other than in exceptional circumstances.
• Granting homeowners on private and mixed tenure estates rights of redress.
• Amending the Building Safety Act 2022 to further protect leaseholders.

RICS response

RICS welcomes the passing of the Leasehold and Freehold Reform Act. The Act will provide clarity to leaseholders, landlords and the market. The reforms saw many RICS members share a variety of views, but underpinning all responses was the importance of protecting leaseholders and residents, while also ensuring we continue work to deliver more high-quality housing.

Whilst many of the measures in the Act will require further consultation and secondary legislation and there is a long way to go, the Act ends the months of uncertainty that have been hanging over the reforms.

RICS members and leaseholder representatives had raised concerns that as the legislation developed, enfranchisement cases stalled as the market waited to see what happened. Freeholders and investors, who have a role to play in addressing the housing supply challenge also told RICS that the reforms were impacting their inward investment plans while they awaited the outcome of the legislation.

Valuation uncertainty further complicated matters, and we will continue to wait for the outcome of the consultation on ground rents and to see the position that the next government will take. Amendments to protect deferment rates from dropping below 5% were not included in the final Act and RICS calls on the government to confirm what future rates would look like to protect leaseholders from being hit with rising premiums.

The changes the Act introduces will only be as good as those who support the sector. That is why it is essential that the role of Registered Valuers is not undermined, and they continue to provide professional valuation advice. We encourage the government to continue pushing for greater regulation and professionalism in the sector, taking advantage of the role bodies like RICS offer in delivering standards and consumer protection which will ensure leaseholders receive the best service.

Timings

Most of the provisions will be subject to Statutory Instruments, which will depend on the next government's priorities and any Secondary Legislation required. Provisions relating to the Building Safety Act and the changes to the recovery of legal costs through service charges could be introduced in the next two months, subject to the approval of the next Secretary of State.

The government must answer some important questions ahead of the Act’s implementation. For example, RICS know of concerns concerning lifetime leases and the lack of guaranteed protection leaseholders will have in the future. Furthermore, the government must reflect on the impact to building safety, especially the protections current leaseholders have from remediation costs who, upon forming a commonhold or resident management company, risk facing significant cost contributions.

For the benefit of leaseholders, RICS members and the wider industry, the next government must set out a clear timetable for the implementation of the Act to avoid months of uncertainty.

Impact on leaseholders and residents

• The findings of the 2016 National Leasehold Survey reported that 57% of leaseholders regretted having bought a leasehold property, while 66% of leaseholders were unsatisfied with the service provided by their management company.
  
• Whilst the Act makes it easier for leaseholders to exercise their rights to manage or collectively enfranchise, appointing their own managing agent, the regulation of agents has not been addressed. We would welcome discussions with the next government about how RICS regulates our members – including those who act as managing agents – and how this could be extended across the sector.
  
• In partnership with The Property Ombudsman and an expert working group, RICS has developed a Block Management Sector Code to set the benchmark for best practices in the sector. Rolling this out to all leasehold properties, where there is a managing agent in place, would ensure that there is greater clarity for leaseholders on the service that they should receive.
  
• RICS is proud of the work that we have done with regard to the Service Charge Residential Management Code. The Secretary of State approved code has recently been reviewed to include housing associations, offering leaseholders in this sector the same level of transparency and clarity on service charges as those in the private sector. We would welcome a discussion with the next government to ensure the swift approval of the new Code.
  
• RICS has called for the mandating of the ‘How to Lease’ guide so that any new or prospective leaseholder receives relevant information before purchasing a property could support improvements in awareness.
  
• Amendments to shared ownership enfranchisement have raised difficulty in leasehold extensions and put those owners at a disadvantage. RICS advocates reform to the system so a shared owner is offered the same degree of rights as a standard leaseholder in their lease extension. There are valuation implications that have now arisen from amendments on shared ownership and marriage values.
  
• Many RICS members work as managing agents for blocks, helping to ensure standards and management practices are upheld, and would welcome discussions with the next government on how leaseholders can be supported to take on the management of buildings, especially those more complicated blocks.
  
• The Act doesn’t address one of the other big concerns RICS are hearing – rising service charges. In engagement with RICS members working in the sector, and representatives for leaseholders and freeholders, rising service charge costs are regularly cited as one of the biggest concerns to leaseholders. Economic conditions, safety and sustainability matters, and an overall drive to improve quality and satisfaction for leaseholders means service charges are increasing. We encourage the government to do more to ensure leaseholders know their rights and what service level they can expect from the RICS Service Charge Residential Management Code.

Valuation considerations

RICS welcomes the measures in the Act to grant 990-year leases.

• Clarity around valuation requirements, including the application of the final detail of the act is important for both landlords and tenants, as these could in turn affect the sale or purchase of the leasehold, the cost of lease extension and enfranchisement and the value of ground rent investments. RICS previously published a statement about material valuation uncertainty in residential ground rent investments, uncertainty that is likely to continue until final details of the Act implementation take place.
  
  
• We would like the next government to prioritise responding to the ground rent consultation to remove current uncertainty. This will further support the valuation process by giving stability to the sector, and assurance to freeholders and investors over the future model they will be operating within.
• The 2020 Law Commission Report on leasehold enfranchisement suggested the introduction of an online calculator to support the valuation of leases for extensions or buyouts. Calculating the value of a leasehold property is complex, especially when factoring in wider reforms to marriage value and ground rents. Many valuers have expressed concerns to RICS that a calculator model could disenfranchise leaseholders, as it could lack a professional valuation, and only be based on wider market value. As a result, many leaseholders could be paying above what the true value is. For this reason, RICS urges that any use of a calculator must be supported by a professional valuation, undertaken by a Registered Valuer.

Freeholder considerations

• RICS understands there are significant concerns facing freeholders about legislative changes in the Act.  We are aware that several are exploring their legal options due to the impact this could have on their business and operating model. With RICS members representing both leaseholders and freeholders, we would welcome further discussions with the government about the impact to ensure that any potential unintended consequences are mitigated, and leaseholders are not adversely affected.
• The Act will place additional financial risk and liability on freeholders who may opt to dispose of a block should it become more appealing than maintaining the asset. This risks potential remediation plans and places additional strain on leaseholders stepping into commonhold or a Resident Management Company who will, alongside any managing agents, have the challenge of overseeing remediation strategies and financial requirements.

Investment considerations

• Investors, including major pension funds, have an important role in helping to deliver the UK’s housing needs and the successful management of estates. With the passing of the legislation, the sector will, to an extent, at least benefit from not having months or years of further uncertainty so long as the implementation period, and necessary secondary legislation are confirmed promptly by the next government.
• RICS is aware that some investors have been pausing residential portfolio investments pending changes to legislation, the next government must consider the impact such changes will have on the attractiveness of investing in UK property development and supplying much-needed housing.