The Leasehold and Freehold Reform Act, which received Royal Assent on 24 May 2024, represents a significant transformation in the UK's property landscape. Although the Act's provisions are not expected to come into effect until early 2026, this legislation aims to address long-standing concerns about the challenges faced by residential leaseholders. As with any major legal reform, the Act will have both beneficiaries and those who may be disadvantaged. Below, we outline the key changes introduced by the Act and explore the potential impact on residential leaseholders and landlords. The new Act and the anticipated regulations will affect all long residential leases, not just those entered into after 24 May 2024.
Key Provisions of the Leasehold and Freehold Reform Act 2024
- Abolition of Marriage Value
Under previous legislation, residential leaseholders with fewer than 80 years remaining on their lease were required to pay a 'marriage value' when extending their lease. This marriage value represented the difference in the property's value before and after an extension had occurred. Following the determination of this figure, the leaseholder would be liable for a payment to the freeholder for 50% of this value. The abolition of this requirement is intended to significantly reduce the financial burden on leaseholders who are seeking to extend their leases.
This change will make residential lease extensions more affordable and accessible, likely leading to an increase in instructions for law firms. Leaseholders who have historically delayed extending their leases in anticipation of legislative change will likely be spurred into action following the Act. From a landlord's perspective, this reform will result in reduced income, particularly those who acquired freehold properties with leases nearing the 80-year threshold. The loss of expected capital payments could have a significant impact on portfolio valuations, especially for those with residential property in London and its surrounding areas.
A secondary effect of this change is likely to be a shift in the residential leasehold market dynamics. Historically, leasehold properties have been less attractive to residential buyers due to the risk of marriage value payments. With this risk now removed, the number of disputes between leaseholders and landlords over lease extensions is expected to decrease, simplifying the legal landscape in respect of litigious work.
- Standard Lease Extension to 990 Years
Another major change brought about by the Act is the extension of the standard residential lease term to 990 years. This reform is designed to provide leaseholders with greater security, ensuring long-term stability in their property ownership without concerns over a diminishing lease term.
While this change aligns with the abolition of marriage value, it differs materially by affecting the duration of the lease rather than the financial aspects of extending it. As a result, there will be fewer lease extensions needed, and the distinction between freehold and long leasehold properties will become less pronounced. This is likely to increase demand for leasehold properties, with their prices moving closer to those of freehold properties.
Freeholder landlords, however, will likely find themselves on the losing side of this legislative change, as they will lose much of the significant control and influence which they previously held over their leased residential properties. With fewer opportunities to renegotiate lease terms, freeholders may find their position further weakened.
- Freehold Purchase Rights
The Act significantly enhances residential leaseholders' rights by allowing them to extend their lease or purchase the freehold to their property immediately upon acquiring the leasehold title to the property. Previously, leaseholders were often subject to a waiting period—typically two years—before they could initiate a lease extension or begin the process of enfranchisement. This waiting period was a source of frustration for many leaseholders, particularly those who purchased properties with short leases and wished to secure their investment as soon as possible. The removal of this restriction provides leaseholders with greater security and confidence, knowing they can take immediate action to protect and enhance their property rights.
A further positive from the perspective of a leaseholder is that this Act ensures they will no longer be responsible for landlords' costs. Previously, leaseholders seeking to purchase the freehold were responsible for reimbursing landlords' legal and valuation fees, often adding a substantial financial burden to the process. Under the new Act, these costs will no longer be passed on to leaseholders, thereby reducing the overall expense of enfranchisement and enhancing leaseholders' ability to secure their property rights without facing prohibitive additional costs. This provision also applies to lease extensions as well as the enfranchisement process.
This provision further levels the playing field between leaseholders and freeholders, reducing the power imbalance that previously existed. Freeholders often held a significant advantage due to waiting periods and high costs, which could be used as leverage in negotiations or result in delay to the enfranchisement process. By allowing leaseholders to extend their lease or purchase the freehold immediately, the Act mitigates these power dynamics, enabling leaseholders to take proactive steps to secure their property rights without delay.
Conclusion
The Leasehold and Freehold Reform Act 2024 introduces transformative changes to the UK's property system. By reducing financial risks and power imbalances, the Act gives residential leaseholders greater control and flexibility. It aims to simplify leasehold transactions, improve leaseholder rights, and reshape the relationship between leaseholders and freeholders. As the implementation date approaches, it will be important to monitor the progress of secondary legislation to fully understand the Act's impact. We will be monitoring the implementation of the Act and will release further articles in due course as and when the various changes come into play.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.