The Leasehold and Freehold Reform Bill: what it means for leasehold and estate management costs and rentcharges

Insight

29.11.2023

Michael Gove unveils “landmark moment for millions of leaseholders across the country” as the Leasehold and Freehold Reform Bill is introduced to Parliament. So, what does this mean for leasehold and estate management costs and rentcharges?

The Leasehold and Freehold Reform Bill (Bill) was introduced to Parliament on Monday 27 November and the draft Bill seeks to regulate service charge and estate management costs as well as provide tenants and occupiers with comprehensive rights of redress in the event of poor or exploitative management practices. The Bill also seeks to prevent a landlord reclaiming possession for an unpaid regulated estate rent charge. We summarise the key management changes below.

You may also be interested in our related article on “The Leasehold and Freehold Reform Bill: what it means for Leasehold Enfranchisement and Extension”.

Changes to the regulation of leasehold management

Service charge

Service charge demands will need to be in a prescribed form and given to a tenant in a specified manner. The specifics of the prescribed form will be set out in separate regulations (and are not covered in the Bill itself), but a landlord will be unable to enforce payment unless the requirements are met. Lease provisions relating to non-payment or late payment of service charges will be unenforceable if the service charge demands are not compliant with the regulations.
A landlord will have to provide annual service charge reports. For properties with four or more dwellings where there are variable service charges, the annual reports will need to be accompanied by service charge account statements which are certified by an accountant. Again, separate regulations will set out the detail of how the service charge reports should be supplied.
Tenants will have a right to request service charge information from a landlord and the landlord will have to comply with these requests. The information which a tenant can request is not set out in the Bill and will be specified in subsequent regulations.

Insurance

Where a service charge is payable, the Bill provides that it will be an implied term of the lease that a tenant must pay towards specified permitted insurance costs (to be defined in regulations).
A landlord will be barred from charging the costs of arranging insurance to the tenants and will be under a duty to provide specified insurance information to the residential tenants.

Administration Charges

Landlords will need to publish an administration charge schedule for any building containing one or more dwelling. What is to be covered by an administration charge schedule and the definition of “building” is to be prescribed by regulations, but a landlord will only be able to recover administration charges from tenants where these are on the published schedule.

Litigation

Litigation costs will not be recoverable via the service charge unless a landlord makes a successful application to the Court or Tribunal for an order to the contrary.

Changes to the regulation of estate management

Homeowners within an estate will only be liable for estate management charges incurred by the manager of the estate (typically the estate freeholder) which are reasonably incurred and where charges are incurred for the provision of services or works homeowners will only be liable if the services or works are of a reasonable standard. Where an estate management charge is payable before costs are incurred, adjustments must be made if the actual costs are lower than anticipated.
Regulations will set out a procedure which estate managers will need to follow when carrying out works. The regulations will include obligations for the estate manager to consult with the homeowners and provide estimates for the proposed works. Where the costs incurred for the works exceed an appropriate amount and the consultation requirements have not been followed, the manager of the estate may be required to contribute to the cost of the works.
Estate management costs incurred more than 18 months prior to demand cannot be charged to homeowners unless the homeowners had prior notification of their liability to contribute to those costs.
As with service charge demands, estate management demands will need to be in a prescribed form and the estate manager will need to provide annual estate management reports. An estate manager will need to publish an administration charge schedule and will only be able to recover costs where these are on the published schedule. Owners of a managed dwelling will be able to request estate management information from an estate manager. Regulations will be published which give effect to and detail each of these changes.

Enforcement of regulations

Under the Bill, tribunals will have powers of enforcement against landlords and estate managers and will be entitled to award damages to tenants and homeowners. Damages are limited to £5,000 for service charge, insurance and estate management matters and £1,000 for administration charge matters.

Rentcharges

The owner of a regulated estate rentcharge will not be able to take possession of a property due to non-payment of a rentcharge, even if the document creating the rentcharge expressly grants this right to the rentcharge owner.
No action can be taken to recover regulated estate rentcharges until 30 days has passed following service of a payment demand by the rent charge owner. The demand must be served on the landowner (and the charged land if different to the landowner’s address) and set out details of the rent charge owner (including evidence of ownership), the amount owed and how to pay.
Regulations may be issued at a later date to limit amounts that can be charged in relation to the costs incurred by the rent charge owner in respect of the recovery of rentcharges.

Conclusion

These changes will be welcomed by tenants and provide much needed transparency but come at a time of ever greater management challenges for landlords. The prescribed management requirements set out in the Bill will require a full review and update of process for landlords and managing agents, many of whom are still grappling with increased management burdens following the recent overhaul of building safety and fire regulations.

The burden of complying with the new requirements coupled with the losses that will be incurred in relation to non-compliance means there is a real chance that the management of buildings and estates will run at a deficit. When the changes introduced by the Bill are considered alongside ground rent reductions and the new building safety and fire regulations, the appeal of owning and managing buildings and estates is diminishing.

A lot of the detail to the Bill is dependent upon secondary legislation, so there will be plenty to consider in the months ahead. At this stage, we do not know how much of the proposals in the Bill will become law. However, with an election on the horizon, the Government will be seeking to deliver on its manifesto commitments in relation to leasehold reform and the passing of this Bill will be a crucial part of this.

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