The Leasehold and Freehold Reform Bill is making relatively speedy progress through Parliament having had its first reading in the House of Lords on 28 February 2024. If passed into law (which might depend on the timing and outcome of the next general election) it will make significant long-term changes to home ownership in England and Wales.

The proposed changes to the process that residential leaseholders must go through, and the price they must pay, to extend their leases or buy their freehold have been much publicised.

However, the Bill contains some other very important changes that have received less attention, some of which have only just been inserted in the latest round of amendments.

We provide an overview below of the key parts of the Bill as it currently stands, before looking in more detail at some of its lesser-known proposals.

In particular, we consider amendments that will make it easier for leaseholders to exercise the Right to Manage, that will strengthen the rights and remedies of leaseholders and homeowners on freehold estates to understand and challenge the amounts they are charged, and valuable new rights to request information when they are trying to sell.

Overview

The main elements of the Bill are intended to:

  • Ban the grant of certain long residential leases of houses after the Bill becomes law.
  • Make it cheaper and easier for existing leaseholders in houses and flats to extend their lease or buy their freehold. 
  • Widen the Right to Manage so that it is available for a greater number of mixed-use buildings.
  • Give leaseholders greater protections and transparency over residential service charges, insurance, administration charges and litigation costs.
  • Regulate estate management charges, to provide homeowners on freehold estates with similar protections to those enjoyed by residential leaseholders.
  • Give both leaseholders and freeholders on managed estates a right to make information requests when they are looking to sell.
  • Regulate demands for payment of certain regulated rentcharge arrears, and amend the remedies for non-payment.
  • Amend some of the “leaseholder protections” in the Building Safety Act 2022 (concerning the costs of fixing historic building defects), including to clarify the scope of remediation orders and remediation contribution orders.    
Much of the press coverage of the Bill has understandably focussed on the proposed changes to the legislation around lease extensions and collective enfranchisement claims.

However, the provisions relating to the Right to Manage, residential leasehold regulation, estate management charges and sales information requests are noteworthy in their own right. We look at each of these below.

The Bill does not, currently, say anything about “commonhold”. This is a structure of ownership introduced in 2004 as an alternative to leasehold. It allows residents of a building to own the freehold of their individual flat (or “unit”) and to manage the shared areas through a commonhold association. There has, however, been little take-up of commonhold to date. The government has previously indicated that it was considering changes that would reinvigorate and encourage greater use of commonhold. This is therefore a surprising omission from the Bill, although some of the debates in Parliament suggest it may not have gone away for good.

Widening the Right to Manage

The Right to Manage is the right for the leaseholders of a building containing flats to take over most of the management functions from their landlord, via an RTM company.

At the moment, the Right to Manage does not apply to buildings where the floor area of the non-residential parts exceeds 25% of the floor area of the building taken as a whole.

If passed into law, the Bill will increase this threshold to 50%.

Accordingly, whereas leaseholders could currently only exercise the Right to Manage if the residential floorspace is 75% or more of the whole building, the Bill would allow leaseholders to exercise the right if the residential floorspace is only 50% or more of the whole building.

This will mean that the Right to Manage will apply to many more mixed-use buildings than before, where those buildings contain both residential flats and commercial units.

This may even include some buildings that have been designed specifically to avoid such rights from arising.

In addition, whereas currently an RTM company is liable for the landlord’s reasonable costs once a claim notice has been served, the Bill proposes to change this so that each party will usually be responsible for paying their own costs.

The tribunal will, however, be able to order an RTM company to pay the landlord’s costs if a claim notice is withdrawn or ceases to have effect and the RTM company has acted unreasonably.

Improved regulation of residential service charges

The Bill will introduce the following:

  • Right to challenge fixed service charges – some protections that currently only apply to variable service charges, such as the right to apply to the tribunal for a determination as to whether a service charge is payable, will be extended to charges where the amount is fixed by the lease.
  • Future demand notices – currently, landlords can preserve the right to issue a service charge demand by informing leaseholders within 18 months of incurring the associated costs that they will be required to pay at a later date.  The Bill will enable regulations to be made that will specify the form and content of this protective notice, which will be known as a “future demand notice”. 
  • Form of service charge demands – regulations will be made requiring demands to be in a specified form, contain specified information and be served in a specified manner.
  • Statement of account and annual report – landlords will need to provide leaseholders with a written statement of account in a specified form within six months of the end of a 12-month accounting period, certified by a qualified accountant.  Landlords will also need to provide an annual report within one month of the end of a 12-month accounting period.
  • Right to service charge information – leaseholders will be able to request service charge information, which landlords will be obliged to provide within a given period of time.  These information rights will replace existing rights, including the right to request a summary of relevant costs and to inspect supporting accounts.
  • Remedies to enforce information rights – if the landlord fails to comply with their new obligations to provide information, leaseholders will be able to apply to the tribunal for an order compelling the landlord to comply (specific performance) and pay compensation of up to £5,000. 
  • Prohibition on certain insurance costs – aside from the insurance premium, landlords will only be able to charge permitted insurance costs.  These are likely to be restricted to a reasonable handling fee for placing and managing the insurance. 
  • Requirement to provide insurance information – landlords will be required to provide leaseholders with specified information about the insurance within a specified time.  If they do not, a leaseholder will be able to apply to the tribunal for an order for specific performance and compensation of up to £5,000.
  • Duty to publish schedule of administration charges – landlords will be required to publish a schedule specifying the amount of any administration fees (for things like registering notices of assignment and dealing with approvals) or give details of how the amount will be determined.  In default, leaseholders will be able to apply to the tribunal for an order for specific performance and compensation of up to £1,000.
  • Limiting landlords’ rights to recover litigation costs – many leases allow landlords to recover the costs that they incur in legal proceedings through the service charge or as administration charges.  Leaseholders can, however, apply to restrict the landlord’s right to recover such costs.  Provisions in the Bill will effectively reverse how this works.  The landlord will not be entitled to recover its costs as an administration charge or via the service charge unless the tribunal or court directs otherwise. 
  • Right for leaseholders to claim litigation costs from landlords – it will be an implied term of the lease that if there are relevant proceedings concerning the lease, and the court or tribunal orders the landlord to pay an amount in respect of the leaseholder’s litigation costs, the landlord must pay that amount. Any lease term that purports to say otherwise will be of no effect.
  • Redress scheme – a package of new clauses have been inserted into the Bill that will provide that landlords (and freehold estate managers) could be required to join a redress scheme.  The detail will be set out in regulations.
Regulation of estate management charges

It is not uncommon for freehold houses on an estate to be sold-off on the basis that the buyer will pay an annual sum towards the maintenance of things like the shared roads, drains and gardens.
Currently, these types of estate management charges on a freehold estate are largely unregulated.

The Bill seeks to change this by giving freeholders who pay estate management charges similar rights to those enjoyed by leaseholders to challenge the reasonableness of service charges.

The Bill provides for the following:

  • Reasonableness of estate management charges – they will only be payable to the extent that they are reasonably incurred, and the works or services to which they relate are of a reasonable standard.  Any charge that is demanded in advance must be reasonable.
  • Consultation process for estate works - the estate manager will need to follow a consultation process if it proposes to carry out works that will cost more than a specified amount.  If it does not, and does not obtain dispensation, they will only be able to recover the specified amount.  These provisions are similar to the existing section 20 consultation process that residential landlords must follow. 
  • Future demand notices - as with residential service charges, the estate owner will have 18 months from the date the costs are incurred to demand payment unless it serves a “future demand notice” on the freehold owner.
  • Tribunal applications to determine payability - freehold owners will be given a similar right to apply to the tribunal for a determination as to whether the estate or administration charges are payable and, if so, who should pay, to whom, the amount, the date and manner in which it is payable.
  • Form of estate management charge demands - demands will need to be in a specified form, contain specified information and be given in a specified manner.
  • Annual report - estate managers will need to provide owners with annual reports within one month of the end of each 12-month accounting period.
  • Information rights - freehold owners will have similar rights as leaseholders to request information from estate managers about the estate charges.
  • Enforcement rights - owners will have the equivalent right to apply to the tribunal for an order compelling the estate manager to comply with the obligations relating to the form of demands, provision of annual reports and supply of information, and to award compensation up to £5,000.
  • Duty to publish schedule of charges - estate managers will need to publish a schedule of charges if they expect to charge a fee for things like granting or dealing with applications for approvals, providing information or for alleged breaches of an owner’s obligations.  If it does not, a freehold owner can apply to the tribunal for specific performance and compensation of up to £1,000.
  • Appointment of substitute estate manager - freehold owners on an estate will be able to give the estate manager a “notice of complaint”.  If the complaint is not remedied within six months, the owners will be able to serve a “final warning notice”.  If the estate manager still does not remedy the breaches within a reasonable period, or the breaches cannot be remedied, the freehold owners could apply to the tribunal to appoint a substitute estate manager. 
  • Redress scheme - freehold estate managers could be required, by regulations, to become a member of a new redress scheme.
Sales information requests

New provisions have been added to the Bill enabling leaseholders who are contemplating selling their flat, to require a landlord to provide specified information.

Freehold homeowners on a freehold estate will be given similar rights to make a sales information request when looking to sell their property.

The Bill says that regulations will set out how a request must be made and what information must be provided.

The type of information will likely need to relate to the management of the property, the manager, management charges, relevant obligations, and be information reasonably expected to help a prospective purchaser decide
whether to purchase the property. We anticipate that this will therefore include information that the Law Society’s standard management enquiries already seek to elicit (for example, to do with ground rent, insurance, service and estate charges).

If the landlord or estate manager does not comply with a sales information request, the leaseholder or freeholder owner will be able to apply to the tribunal for an order for specific performance and compensation of up to £5,000.

WolfBite

One might question whether it is sensible to be considering such radical changes at a time when the Building Safety Act is still bedding-in, and when the government is also looking to make wholesale changes to the shorter-term rental market through its Renters (Reform) Bill.

However, leaving the enfranchisement-related measures to one side, the Leasehold and Freehold Reform Bill contains several proposals that could make a positive difference, such as the measures to regulate freehold estate management charges and the new rights to make sales information requests.

We advise freeholders about what they can, and in some cases can’t, do where they are asked to pay large amounts for shared services on freehold estates, or where those services are not being provided at all. Giving freehold homeowners equivalent rights to residential leaseholders would be a welcome step.

Similarly, it is serious issue if a leaseholder or homeowner is trying to sell their property but cannot get necessary information to pass on to a prospective buyer. Buyers often pull out, leaving properties potentially unsaleable. There are currently no effective remedies. Giving leaseholders and freehold homeowners a direct cause of action would go a long way to addressing this very real problem.