The Leasehold and Freehold Reform Act 2024: what should landlords and tenants do now?

In our previous article, we considered the Leasehold and Freehold Reform Bill and what it would mean for leasehold enfranchisement and extension.

One of the final acts of the last government was to ensure the Bill received Royal Assent. The Leasehold and Freehold Reform Act 2024 (the New Act) became law on 24 May 2024. However, although it is now law, the provisions are yet to come into force. The commencement date of the New Act will be determined by this government, and it seems likely we may be waiting until late 2025 or early 2026 for the changes to come into effect.

For now, the provisions of the Leasehold Reform Housing and Urban Development Act (1993 Act) and the Leasehold Reform Act 1967 (1967 Act) continue to apply as they did prior to the New Act becoming law.

The changes

The New Act will affect all of the substantive and procedural changes set out in our previous article by amending the provisions of the 1993 Act and the 1967 Act.

The overall effect of the New Act is that tenants’ statutory enfranchisement rights will be greatly enhanced. The procedure for making a claim will also be simplified.

Below is a summary comparing the current statutory lease extension provisions under the 1967 Act and the 1993 Act with those under the New Act.

Continuing uncertainty

Unfortunately, the valuation position remains unclear. The valuation method under the New Act will need to be determined by secondary legislation and the drafting of this secondary legislation may require further consultation. It is confirmed that marriage value will be abolished and this may make premiums cheaper. However, it is not yet known whether there will be other changes which might offset the reduction on the premium gained through the abolition of marriage value. For example, some valuers think that capitalisation rates will be set which will offset some of the benefit to tenants.

It is anticipated that any consultation on the valuation methodology will be contentious. Large private landlords (such as the key London estates) and institutional landlords (such as pension and investment funds) are facing a substantial decrease in the value of their assets and ongoing income. These landlords will likely seek to apply significant pressure on the new government to ensure the impact of abolition on marriage value is ameliorated by other valuation changes.

The New Act also fails to resolve a number of issues deriving from the existing legislation.  For example, the New Act does not amend the definition of “house” under the 1967 Act despite it being a widely disputed definition which has been the subject of a great deal of litigation over the years. There will continue to be confusion about what constitutes a “house”, particularly in mixed-use premises (eg where residential premises are situated above commercial premises). This and other loopholes and uncertainties in the 1993 Act and 1967 Act will continue to create uncertainty and lead to disputes.

What should tenants do now?

Until the New Act comes into force, many tenants will be in limbo and will need to decide whether to wait and pursue their claim under the new legislation. Expert legal and valuation advice will be critical to those who are unsure what to do.

Those who can delay their intended claims may wish to wait and launch a claim to extend the lease or purchase the freehold of their property when the New Act comes into effect. The process will certainly be easier under the New Act (although tenants should appreciate that premiums may not necessarily be cheaper).

The decision may be more challenging for those tenants holding leases with a particularly short remaining term. Tenants with remaining lease terms which are just over 80 years (the point at which marriage value applies) may also wish to consider their position carefully.

What should landlords do now?

If they have not already done so, landlords should carry out a risk assessment of their existing portfolio and consider which properties are at risk from an enfranchisement claim. Landlords may wish to consider lobbying in anticipation of the secondary legislation dealing with valuation being introduced, to see if the loss of marriage value can be balanced with other more favourable changes.

Next steps

Please let us know if we can assist in advising you on how the proposed reforms apply to your circumstances and how (either as a landlord or as a tenant) you should proceed at this stage given the uncertainty that remains.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2024