The Leasehold and Freehold Reform Act 2024 (LAFRA) becomes law

On Friday 24 May 2024, the Leasehold and Freehold Reform Act 2024 (“LAFRA”) received Royal Assent during what is known as the “wash-up”. LAFRA introduces fundamental changes to the valuation methodology and the legal process with a view to making it cheaper, easier, fairer and more transparent for leaseholders to extend their leases and buy their freeholds.

What is the “wash-up” period?

The “wash-up” period refers to the final days of a parliamentary session before it dissolves for a general election. During this time, outstanding bills are expedited through remaining legislative stages. This meant that LAFRA was “fast-tracked” through the legislative process, bi-passing its committee stage and the potential for any substantial amendments or extensive debate originally scheduled in the House of Lords for next month. This followed the snap Election taking place on 4 July 2024.

Why change the existing leasehold enfranchisement legislation?

Reform of the existing leasehold enfranchisement arena has been subject to extensive consultations since 2018 by the Law Commission where numerous potential amendments have been mooted, discussed and debated. Since the King’s Speech last year, there has been widespread bipartisan support for reform. The Act received broad cross-party support, facilitating its swift passage. The Government also prioritised the Act to address longstanding issues with lease extensions and enfranchisements to make it easier and cheaper for leaseholders to buy their freeholds and extend their leases.

The key provisions

While the Act has been passed, its provisions will come into effect on dates specified by the Secretary of State, following the introduction of necessary secondary legislation. As yet, there is not a definitive timeframe. The controversial proposal to cap ground rents at £250 per annum, or reduce them to zero, has been scrapped. Ground rent has therefore for now, at least, not been abolished. The outcome of the consultation on capping ground rents that closed in January 2024 is still unknown.

• 990-year lease extensions: leaseholders can now extend their leases by an additional 990 years with ground rent reduced to a nominal ‘peppercorn’ rent. This change offers long-term security and removes the need for repeated lease extensions during the course of the term of the existing lease.
• Ban on leasehold houses: only a very limited category of permitted leasehold houses are outlined in LAFRA.
• Abolition of marriage value: this will reduce the premium payable significantly for leases of less than 80 years. Marriage value is the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease.
• Immediate lease extensions: the two-year ownership requirement for extending leases or purchasing the freehold has been abolished, allowing new leaseholders to act immediately. This will take the pressure off those purchasing short leases during the conveyancing process and the pitfalls associated with assignments of the benefit of notices.
• Mixed-use buildings may now qualify to buy their freeholds and the Right to Manage (RTM): increasing the commercial property element from 25% to 50% of floor area to allow a building to qualify for enfranchisement or RTM. This will enable a huge number of mixed-use buildings that have previously not qualified.
• Statutory costs: the arguments over reasonableness of section 33 and section 60 costs may well be confined to history. Freeholders will be required to pay their own costs except in low-value claims.
• Non-participating flats and commercial/non-residential areas in collective enfranchisement claims: freeholders can be forced to retain any non-participant flats or commercial areas. There will be no necessity to locate white knight investors to fund non-participating flats.
• Valuation methodology: The Secretary of State is to prescribe deferment and capitalisation rates; however, we do not know how or when these will be set. The Minister in the House of Lords said they would be set at market rates, to be reviewed by regulation every 5–10 years. These rates will be set by way of secondary legislation which as stated is yet to be drafted or introduced.

The potential shortcomings of LAFRA

While the removal of marriage value will reduce the price to extend or enfranchise any leases under 80 years, any lowering of the deferment or capitalisation rate (which is a key component in the calculations of premiums) may then increase the premium for leases with over 80 years unexpired.

We will also have to wait and see what deferment rate will be determined, with a possible move away from the 2007 adopted Sportelli rates of 5%/4.75% for flats and houses, respectively.

Uncertainty remains

Until secondary legislation is in place to implement the core elements of LAFRA, there is uncertainty about when the new law will be operative. Indicatively, 2025 or even 2026 have been mooted. Most of the provisions will be subject to Statutory Instruments, which will depend upon the next government’s priorities and any secondary legislation required.

If you have questions about the Leasehold and Freehold Reform Act 2024 and how it will impact you, please contact Katie Cohen.