Ultimate landlord guide to leasehold reform 2024

June 20, 2024
Ultimate landlord guide to leasehold reform 2024

Various problems associated with leasehold properties have been under review by government for a number of years. Some of the biggest issues for owners of leasehold flats and houses have been:

  • The spiralling cost of ground rent charged by the freeholder
  • Lack of clarity over service charges for maintaining the property
  • The cost and time it takes to extend a lease
  • Restrictive covenants, such as no pets and no sub-letting
  • Freeholders not responding or taking a long time to supply information required to buy and sell leasehold property

While ground rent for new leases was abolished in 2022, it took another two years for other aspects of leasehold reform to pass into law. However, because the 2024 General Election was announced sooner than had been expected, there was not enough time before Parliament was dissolved for ministers to decide when the different parts of the Leasehold and Freehold Reform Act 2024 would come into force and to draft the relevant statutory instruments bringing this into effect.

As it currently stands in June 2024, although we know what leasehold changes are going to come into effect, we don’t yet know when.

Here is a round-up of what has been passed into law to date and what it means for existing and future leaseholders.

The Leasehold Reform (Ground Rent) Act 2022

While a leaseholder ‘owns’ the right to occupy the property itself for the length of the lease, the land on which the property stands belongs to the freeholder. Ground rent is a payment made to the freeholder – commonly annually or every six months – in respect of this.

The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022 (1 April 2023 for retirement properties), restricting ground rents on new leases and extensions to existing leases to a ‘peppercorn’ (zero) rent. Although this was a very welcome step, it did nothing to address the issue of rising ground rent for existing leaseholders.

What do existing leaseholders need to know about ground rent increases?

Every lease will state in what circumstances and how often the ground rent can be increased, and this is usually one of three types:

  • Fixed increments at set intervals, such as increasing by a fixed amount every 10 years or doubling every 25 years
  • Tied to the Retail Prices Index, so the ground rent rises in line with inflation and the freeholder’s income retains its value
  • Linked to the property value. This is rare, but it can lead to very high ground rent charges, especially in more expensive areas where property prices tend to rise well

There is no legal limit on the ground rent that can be charged, although it cannot be raised by more than is stated in the lease.

As the leaseholder, if you feel the ground rent has risen to an unreasonable level, you can try to negotiate with the freeholder to reduce it. This is certainly worth doing if the ground rent cost would make it hard for you to sell the property. However, the freeholder is under no obligation to do this, or they may charge you a fee to compensate them for future lost income.

Note that if you extend your lease, once any current years remaining have expired, the ground rent for the period of the extension will be zero. If you extend your lease under the statute the ground rent will be reduced to zero as part of the ‘deal.’

What was included in the Leasehold and Freehold Reform Bill?

This Bill was brought forward to “…reform the housing market by making it cheaper and easier for leaseholders to purchase their freehold and tackling the exploitation of millions of homeowners through punitive service charges.” (King’s Speech, November 2003)

Just before Parliament was dissolved ahead of the 2024 General Election, the Leasehold and Freehold Reform Bill was passed and became the Leasehold and Freehold Reform Act 2024.

Once it has fully come into force, the Act will strengthen existing consumer rights for leaseholders and introduce new ones.

Here are the key changes that will affect buyers, owners and sellers of residential leasehold properties:

  • It will become cheaper for some leaseholders to extend their lease or buy their freehold
  • The requirement for leaseholders to have owned their property for at least two years before they can extend the lease or buy the freehold will be scrapped
  • Standard lease extension terms will be increased to 990 years, giving leaseholders much more secure ownership. Currently, leaseholders only have the legal right to extend their lease by 90 years for flats and 50 years for houses
  • Leaseholders will be given a new legal right to buy out the ground rent without having to extend the lease at the same time
  • Leaseholders will have greater transparency over service charges
  • It will be made easier for leaseholders to challenge landlords’ unreasonable charges at Tribunal
  • It will become cheaper and easier for leaseholders to take over the running and management of their building
  • Freeholders who manage their building directly will be required to belong to a redress scheme, making it easier for leaseholders to challenge them when necessary. (Managing agents already have to belong to a scheme.) Leaseholders will also no longer have to pay their freeholder’s costs when making a claim
  • Buying or selling a leasehold property will be made quicker and easier through setting a maximum time limit for freeholders to supply the necessary information
  • The sale of new leasehold houses will be banned (other than in exceptional circumstances)

When will the Leasehold and Freehold Reform Act 2024 become law?

Although the Act was passed before Parliament was dissolved ahead of the July 2024 General Election, there was not enough time for decisions to be made about when the various parts would come into force. For the provisions in the Act to become effective other minor legislation has to be passed to deal with the commencement dates and some of the additional provisions. In particular for the valuation reforms to take effect the ‘deferment rate’ and ‘capitalisation rates’ need to be set.

Some of these provisions can be dealt with by an order made by the Secretary of State and other provisions will require more detail in regulations that are yet to be drafted. It is quite possible that the various provisions in the Act will come into force at different times.

As it currently stands, the Act is law but not ‘in force’; and, we don’t yet know when the changes will take effect. However, the Conservative Government’s guidance suggests the reforms will be implemented in stages, beginning in 2025 to 2026.

What has not been included in the leasehold reforms so far?

The biggest area of concern is ground rent for existing leaseholders. Despite promises from the Conservative Government that it would cap or remove ground rent from existing lease, this was not included in either the Leasehold Reform (Ground Rent) Act 2022 or the Leasehold and Freehold Reform Act 2024.

A consultation was held between November 2023 and January 2024, setting out options for how the Government could intervene to cap the maximum ground rent for leaseholders in England and Wales, but the feedback is still being analysed as at June 2024.

When will ground rent be abolished?

Given the impact abolishing ground rent entirely would have on freeholders, it’s more likely that a cap would be introduced as a first step. An amendment could be made to the Leasehold Reform (Ground Rent) Act 2022 at any time, however, there is currently no indication of when this might happen.

Will leasehold actually be abolished in the UK?

While the Conservatives have been focused on leasehold reform, Labour has stated repeatedly that it would abolish the leasehold system entirely and enact mass commonhold if it came to power.

However, the party recognises that this would be a radical measure that would take time to enact and, in April 2024, stated that it would not move forward with this within the first 100 days of a Labour government.

What is ‘commonhold’?

Commonhold, also known as ‘share of freehold’ is where there is no external freeholder and all the owners of properties that would traditionally be leasehold – e.g. flats in blocks – each own a portion of the freehold. They own this through membership of a company (called a ‘Commonhold Association’) and this company owns the main structure and external parts of the building – essentially, everything apart from the flats themselves). The flats are in a type of freehold ownership (‘Commonhold’) and the Association that owns the freehold has a single set of rules that govern what can and can’t be done to the properties and deals with proportions of maintenance contributions etc.

So, rather than owning the lease on the property for a fixed period, under commonhold you own the property as a 'freehold flat' indefinitely.

With no third-party freeholder, all decisions on costs, works, etc., are decided by the Commonhold Association and once decided are set and binding on all the owners.

What does ‘freehold’ mean?

Freehold is where you own both the property and the land on which it sits, and you own the title outright with no time limit.

In contrast, with leasehold, you don’t own the land and only have the right to occupy the property for a period of time (the length of the lease).

In the case of leasehold properties, there is a third party that owns the freehold – that’s the land and any buildings on it. That freeholder then grants leases to permit tenants to occupy property on the land.

What do landlords need to be aware of when buying and letting a leasehold property?

Anyone considering buying a leasehold property should find out, before making an offer:

  • How many years are remaining on the lease
  • How much the ground rent and service charges are, and how often they can/will be increased
  • Whether there are any covenants and restrictions relating to the property, including external areas

As many leasehold properties are flats, it’s essential to check if the property has been affected by the cladding crisis. You can do this via the Government’s website which explains how and why identifying any cladding issues prior to making an offer is essential.  You can also read our article on cladding and the Building Safety Act 2022.

For property investors, another essential question to ask at the earliest opportunity – even before viewing a leasehold property - is whether it can be sub-let. There are three common types of sub-letting clause:

  1. No sub-letting. This means there would be no point in buying the property as a rental investment, because you would not be permitted to let it to a tenant.
  2. No sub-letting without the landlord’s express permission – which they cannot unreasonably refuse. In this case, you should seek their written permission to rent the property out before committing to buy.
  3. No partial sub-letting – i.e. the flat can only be let as whole unit, so you would not be able to rent out individual rooms.  

If the lease does not mention sub-letting, you can presume it is allowed. However, it is important to check for any restrictions on how the flat can be used by your legal expert. For example, the lease might state that it can only be occupied by a single family or household – in which case, you wouldn’t be able to let it to friends or students sharing.

With any leasehold purchase, it’s important to use a solicitor or conveyancer that has specific experience of handling leasehold transactions. And be aware that, because of the additional work required to examine the lease, the legal costs are much higher than for a freehold purchase and since the cladding crisis, costs have gone up because of the extra due diligence legal companies have to carry out.

How long should a lease be when buying a flat?

When a lease gets to around 80 years in length, it can become harder to sell, as many mortgage companies won’t lend unless there are at least 70 to 75 years remaining. For that reason, when a lease drops towards this level, the leaseholder will often look to extend it.

So, when buying, think about how long you plan to own the property and therefore how many years will be left on the lease at that point. You want to have as many years as possible over and above 80 remaining when you come to sell.

On the other hand, if you are in a position to make a cash purchase, it may be a good financial move to buy a property with a short lease that is unmortgageable - as long as the freeholder is happy to negotiate to extend the lease. In that case, you may be able to buy at a relatively low price and add significant value to the property.

Leasehold extension calculator

Calculating the premium to extend a lease can be complicated, so it is advisable to use a legal specialist to handle the negotiations on your behalf.

In order to get an estimate of the cost of a lease extension, you will need:

  • The likely value of the property after the extension (for this, you should engage a surveyor who is experienced in lease extension valuations to prepare a report)
  • The current ground rent
  • The expiry date of the lease / number of years remaining

You can then use an online calculator, such as those provided by:

The Leasehold Advisory Service

Bear in mind that in addition to the premium negotiated for adding extra years to the lease, you will also have to pay for:

  • Legal advice
  • The lease extension valuation report
  • Your freeholder’s reasonable legal and valuation costs
  • Land Registry fees

What happens when a leasehold expires?

When a lease expires, the title reverts to the freeholder. Any leaseholder living in the property at that point can lose their interest in the property.

However, because a lease is a tenancy in the eyes of the law, the leaseholder may continue living in the property unless they or the freeholder choose to end the tenancy. So, if the freeholder wants the leaseholder to vacate the premises at the end of the lease, they must issue the correct notice, stating valid grounds for possession.

If the leaseholder has made improvements to the property during the term of the lease, they may be entitled to compensation, but this is subject to negotiation.

What is ‘marriage value’?

This is the increase in the value of a property once a lease has been extended. It represents an additional gain that is created when the lease is made longer.

When the leaseholder buys the lease extension under the calculation they must pay for two elements (the so called ‘term and reversion’). These elements represent part of the basic amount payable to make the lease longer. However once the lease has been extended the property will go up in value by more than just the original value plus these basic elements. The additional value that is created is known as the ‘marriage value’ and this (under the current law) has to be split 50/50 with the freeholder.

It represents an additional gain that is created when the lease is made longer.

As the leaseholder is only getting the ‘benefit’ of a more valuable property thanks to the freeholder granting the new lease, the freeholder is entitled to half the marriage value. The leaseholder must pay this on top of the actual lease extension cost.

However, marriage value only applies once the lease length has dropped below 80 years, which is one reason why leaseholders will often try to negotiate an extension before this point.

When will marriage value be abolished?

This cost, which currently forms part of the lease extension premium calculation for leases under 80 years, will be scrapped once the relevant part of the Leasehold and Freehold Reform Act 2024 comes into force.

It is hard to say exactly when this will happen, as the Act is likely to be implemented in stages over the coming months and years.

Insurance for leasehold properties

With leasehold properties, building insurance is the responsibility of the freeholder or building management company. Individual leaseholders are then charged an appropriate proportion of this cost within their service charge.

The freeholder’s building insurance policy will normally cover the building structure and any communal areas, including their liability to the leaseholder.

However, if you own a leasehold property that you are letting to a tenant, it is important to know that the freeholder’s policy will not protect you if a tenant, guest or contractor is injured inside your property.

“Liability insurance is an essential feature of any landlord insurance policy as it offers protection if a tenant or visitor is injured on your property. For some properties it may even be mandatory. Landlords should make sure they pick up any safety issues in their property by doing mid-term inspections, encouraging tenants to report repairs and attending to them promptly. If these kinds of things are not done, it may result in a subsequent landlord insurance claim being rejected.”

- Steve Barnes, Head of Broking at Total Landlord

Your freeholder’s policy is unlikely to cover you for any damage within your property caused by a tenant or their guests.

As a landlord yourself, you should therefore obtain suitable landlord insurance cover that gives you adequate financial protection, including:

  • Liability insurance
  • Cover for accidental or malicious damage to your property or contents
  • Theft cover
  • Loss of rent or alternative accommodation cover if the property becomes uninhabitable due to an insured event
  • Replacement locks

If you would like to discuss your insurance requirements, get in touch with our team at Total Landlord and they can make sure you have appropriate financial protection.

And for an overview of the different features of landlord insurance, read our guide to finding the best landlord insurance cover for you.

Thanks to Mark Chick, Head of Landlord &Tenant and ALEP Director at Bishop& Sewell, a law firm specialising in personal, property and commercial legal matters, for the guidance featured in this article. We would always recommend that you consult a legal expert for personal advice tailored to your needs.

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