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The Leasehold and Freehold Reform Bill – Key takeaways for charities

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By Anna Phillips

22 Dec 2023 | 2 minute read
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The Leasehold and Freehold Reform Bill had its second reading in Parliament on 11 December and proposes to introduce a number of important changes to the current legislation governing long residential leases.

The proposed changes are generally designed to create a more favourable regime for leaseholders, making it cheaper and easier to extend their leases, and easier to own leasehold property: It builds on similarly themed recent legislative reforms such as the Building Safety Act 2022.

Some of these changes are particularly worth taking note of for charities who own freeholds of premises let on long residential leases. It is also pertinent for charities who are the Personal Representatives and/or beneficiaries of estates which include freeholds and/or residential flats. The proposed changes are key for maximising the sale value of such properties.

Key changes

The changes currently proposed to come into force have the following key impacts:

  • Removing the existing requirement for leaseholders to have owned their house or flat for two years before they can qualify to purchase the freehold or extend their lease. For flats in estates this will mean the current need for PRs to serve notice to extend within a two-year period from grant of probate is also likely to fall away – making it simpler to ensure a lease extension can be triggered and the property has a lease of in excess of 70 year acceptable to mortgage lenders.

  • An increase in the standard lease extension term from 90 to 990 years, with ground rent being reduced to £0 – meaning leases can be extended for significantly longer periods.
  • The removal of ‘marriage value’ from the premium calculation – making extensions cheaper for tenants but less lucrative for freehold owners.

  • An increase in the ‘non-residential’ limit preventing leaseholders from buying their freehold (‘enfranchising’) or taking over management of their buildings from 25% to 50%.
  • Increased transparency around service charge payments and administration fees.
  • Giving leaseholders a new right to request information about service charges and the management of their building.
  • Extending access to redress schemes for leaseholders (albeit it is yet to be confirmed if landlords will be required to belong to a redress scheme).
  • Challenging the presumption that leaseholders pay their landlord’s legal fees when challenging poor practice.
  • Removing the existing requirement for leaseholders to have owned their house or flat for two years before they can qualify to purchase the freehold or extend their lease. For flats in estates this will mean the current need for PRs to serve notice to extend within a two-year period from grant of probate is also likely to fall away – making it simpler to ensure a lease extension can be triggered and the property has a lease of in excess of 70 year acceptable to mortgage lenders.
  • An increase in the standard lease extension term from 90 to 990 years, with ground rent being reduced to £0 – meaning leases can be extended for significantly longer periods.
  • The removal of ‘marriage value’ from the premium calculation – making extensions cheaper for tenants but less lucrative for freehold owners.
  • An increase in the ‘non-residential’ limit preventing leaseholders from buying their freehold (‘enfranchising’) or taking over management of their buildings from 25% to 50%.
  • Increased transparency around service charge payments and administration fees.
  • Giving leaseholders a new right to request information about service charges and the management of their building.
  • Extending access to redress schemes for leaseholders (albeit it is yet to be confirmed if landlords will be required to belong to a redress scheme).
  • Challenging the presumption that leaseholders pay their landlord’s legal fees when challenging poor practice.

How this might affect your charity

Opportunities in relation to leasehold flats

If the requirement to serve notice to extend within two years of grant falls away, this will broaden the opportunity to extend leases of properties left in wills. Accordingly, it may be advantageous to approach freeholders ahead of the changes as extensions may be available when there is no statutory entitled and, in light of other changes, potentially on advantageous terms. Landlords may well wish to secure terms under the old legislation so this can be used to negotiate the premium downward.

Uncertainty for freeholds of residential premises

The proposed changes are less favourable to landlords and are likely to create some uncertainty in the market as to the value of freehold reversions. The changes could, therefore, have an important bearing on how PRs and trustees manage any freehold interests held by or on trust for charitable beneficiaries.

Thee enhanced rights of the leaseholders (i.e., to more easily extend or acquire the freehold), will need to be considered as part of longer-term strategy for managing the trust's interests.

What next?

The Bill is now at the committee stage in the House of Commons, before moving to the Report Stage and then third reading. There have been a number of proposed amendments and additions to the Bill, not least by the Law Society (and we await to see how these will influence the outcome). However, the Bill now looks likely to be passed in substantially the current form and as such Charities should consider it potential impact when planning their strategy to maximise value. If you have any questions at all about how this might impact you, please don’t hesitate to get in touch with our Charity Property team.

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