Pre-Election Round-Up: What Is Happening With Residential Reform?

It's fair to say this is not the article we thought we would be writing at this point. Most people expected an election to be called in the autumn. The prime minister's recent announcement that the country would be going to the polls on 4 July has caused some surprise – and had unfortunate consequences for residential reform.

Here, we summarise where the big legislative changes ended up now that this parliament had ended. Remember, an election does not mean further reform is dead in the water – if the pundits are right, the country may soon find itself with a Labour government, who plan to bring further legal changes to the residential sector.

Leasehold and Freehold Reform Act 2024 ("the Act") – This is now law

After the announcement of the election there was a short parliamentary period to get draft legislation passed The Leasehold and Freehold Reform Bill was one such bill, however given the tight timeframe it passed without some of the amendments that had been proposed. It should be noted that given most of the provisions of the Act do not come into force until the passing of further regulations, therefore most parts do not yet have a date for commencement The parts that will come into force on 24 July 2024 relate to rentcharges, Right to Manage (RTM) recovery of legal costs through the service charge, and amendments relating to the Building Safety Act 2022 (see section 124 of the Act).

During the passage of the Act through the House of Lords, it was appropriately summarised as, "...not the revolution that many leaseholders across the country have been desperate for, but it is the only game in town" Below we summarise the key points leaseholders and landlords must deal with, in what has now become the Leasehold and Freehold Reform Act 2024 ("the Act").

No cap on existing ground rents

In accordance with the Leasehold Reform (Ground Rent) Act 2022, there is a ban ground rents for most new residential leasehold properties in England and Wales However, this left the problem of ground rents for current leaseholders It had been expected that the Act would abolish or cap existing ground rents, but this reform has not made it into the Act, proving too controversial to agree in the shortened timeframe.

Key features

The key features of the Act are as follows:

• Ban on sale of new leasehold houses (so new houses in England and Wales will be freehold from the outset): There are some exceptions to this ban including retirement housing leases, agricultural leases, and shared ownership leases, which can continue

A retirement housing lease is a lease fulfilling the conditions below, and operators should check their leases are compliant. Note that this definition can be amended at a later date by secondary legislation so operators should be aware:

• (a) it is a term of the lease that the house comprised in the lease may be occupied only by persons who have attained a minimum age,
• (b) that minimum age is not less than 55, and
• (c) the house comprised in the lease is part of a retirement development or scheme in which the leases of all the houses in that development or scheme meet the requirements set out in paragraphs (a) and (b).

• Removing the two-year qualification period before a tenant can seek to acquire the freehold of a house or extend the lease of a house or flat when they buy the property: claims can now be made immediately upon a tenant acquiring their lease.
• Easier for Right To Manage companies to take over management from landlord: The right to manage will be available for mixed use premises provided that the internal floor area used (or intended to be used) for non-residential (excluding common parts) does not exceed 50% of the premises' total internal floor area This is an increase from the current 25% limit Therefore a greater number of buildings will now be eligible for this process.
• Easier to enfranchise mixed-use buildings: Currently, if a group of tenants wish to collectively enfranchise, they are prevented from doing so if more than 25% of the building is non-residential The Act increases this threshold to 50% allowing tenants of buildings with a higher commercial element to buy their freehold This higher threshold will also apply to tenants who wish to take over management through a right to manage claim.
• Harder to resist enfranchisement claims: Landlords will no longer be able to oppose an enfranchisement claim on the basis that they intend to redevelop, that they are or will be a resident landlord, or if the land is required for public purposes.
• Longer lease extensions: The Act extends terms for lease extensions to 990 years in addition to the original term, for both houses and flats.
• More affordable for tenants to acquire the freehold or extend their leases: The Act introduces an updated statutory framework which should make the premium payable lower including, inter alia, the introduction of a formula which removes the requirement for marriage value to be paid Further, rather than tenant's paying the landlords legal costs, parties will generally be expected to pay their own costs.
• There is now scope to challenge fixed service charges too (but not as much as tenants can challenge a variable charge): There is already a process for residential leaseholders to challenge variable service charge through the First-Tier Tribunal (in a process set out in the Landlord and Tenant Act 1985) The Act extends some of this regulation, but not all, to fixed service charges For example, although leaseholders paying variable service charges can challenge the charges on the basis of reasonableness, those paying fixed service charges will still not be able to do so (although they can challenge charges at the First-Tier Tribunal on narrower grounds).
• Requirement for landlords to provide clear information in a standardised form for communal charges (or risk not being able to raise charges): With respect to service charge demands, estate management charges and administration charges, the Act makes certain requirements to produce information in a certain way and provide annual reports (or service charge, with damages payable by landlords for default. Importantly, certain charges payable under retirement leases, known as "event fees", are excluded from the definition of an administration charge meaning they can still be charged.
• Landlords must be clearer on insurance costs: Where a lease provides for a service charge to be payable, the Act stipulates that there will be an implied term in the lease that the tenant must contribute towards permitted insurance costs (specifics of which will be defined in regulations) Landlords with variable service charge regimes will not be permitted to charge the costs of arranging and managing insurance Landlords will also be obliged to provide specified insurance information to the tenants Landlord breach could result in a damages' payment.
• Freeholders who live on private or mixed-tenure estate will have similar protections to leaseholders in challenging estate charges: Freeholders will only be liable for estate management charges incurred by the manager of the estate which are reasonably incurred Where charges are incurred for the provision of services or works, homeowners will only be liable if the services or works are of a reasonable standard A consultation will be required for works costing more than a specified threshold (details to be set out in regulations) Where an estate management charge is payable before the costs are incurred, adjustments will have to be made if the actual costs are lower.
• Ability to buy out ground rent: Subject to some exceptions, for certain tenants of existing leases, who do not go down the lease extension route, to "buy out" their ground rent, reducing it to a peppercorn in return for a premium where they have more than 150 years left to run on their lease.
• Power to appoint a substitute manager (via the First-Tier Tribunal process): There is a new power for homeowners of managed dwellings to apply to substitute the estate manager in cases of serious management failure These failures include where the incumbent estate manager is in breach of an obligation to the dwelling, that an estate management charge or administration charge is unreasonable, or that the estate manager has failed to comply with the relevant code of practice.
• Limit on recovery of litigation and non-litigation costs: Litigation costs will not be recoverable under the lease as service charge or administration charge except in circumstances where the landlord obtains a court or tribunal order Leaseholders will also have the ability (via a new implied term in their lease) to apply for costs to be paid by their landlord even in the absence of any lease provision permitting them to do so.
• No more cost recovery: Landlords will not be permitted to recover non-litigation costs in connection with enfranchisement, lease extension or RTM claims through a variable service charge.
• Increased regulation: Regulations can be made requiring (in England) that a landlord or estate manager becomes a member of an approved redress scheme Much of this detail will be contained in regulations which are still awaited, although it is clear from the Act that there will be enforcement penalties against landlords or estate managers of up to £30,000.
• Landlords cannot take possession of a property due to non-payment of a regulated rentcharge – this provision takes aim at historic rentcharges; these can no longer be created, and where they exist, they cannot form the basis of possession. Note, possession for non-payment of estate rentcharges or other rentcharges will still be possible.
• There are also amendments to Part 5 of the Building Safety Act 2022 dealing with financial protections for leaseholders.

Renters (Reform) Bill – This has been dropped

The Renters (Reform) Bill was not in the group of draft legislation that could be passed before Parliament closed That means none of the changes set out in that Bill will become law This is a significant blow to renters who had come quite close to obtaining rights, and security, promised them for some time now.

As the Renters (Reform) Bill has been dropped this means, among other things, that "no-fault" evictions, fixed-term tenancies, contractual rent review clauses are all safe for now However, things may change with the next parliament.

What's next for renters reform?

As noted above, much of the changes in law are reliant on regulations which have not yet been published Although we know broadly what these regulations should do, we await to see the precise detail when this secondary legislation is available.

Further, it seems likely – although not certain – that the General Election on 4 July 2024 will bring with it a Labour government Labour has been a vocal critic of Conservative housing policy, and a supporter of renters' rights Labour supported the Renters (Reform) Bill in the last parliament, and we would expect a Labour government, as a minimum, to commit to the abolition of "no fault" evictions and many of the other securities for tenants that found their way in that Bill. It may be that more radical reform is proposed in due course For example, given the 'sub-optimal' nature of the Leasehold and Freehold Reform Act 2024, there has been growing calls to make commonhold tenure more widespread Support for commonhold was voiced by both Conservative and Labour members.

Any government, come July, is likely to have a sizeable to-do list, and we await to see the position in July before taking stock of what the new parliamentary sessions holds for the residential sector.

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