The government is looking to implement further provisions of the Leasehold and Freehold Reform Act 2024 later this year. What will this mean for landlords of residential assets and those who reside in them?
Following on from the publication of the White Paper on Commonhold reform in March of this year, the government is pushing forward with its commitment to reform a leasehold ownership system that it considers to be unfairly weighted in favour of landlords. Released last week, an open consultation entitled "Strengthening leaseholder protections over charges and services" is seeking views from interested parties on the government's proposals to implement further provisions of the Leasehold and Freehold Reform Act 2024 (LFRA 2024), and to bring in further measures to protect tenants from disproportionate financial burdens.
One of the principal aims of the LFRA 2024 was to "standardise and increase the transparency" of service charges which tenants are obligated to pay pursuant to their leases. Whilst the concept of a service charge is a necessary mechanic to ensure that landlords can maintain the safety of their buildings, the government considers that the current system, particularly when it comes to major works, "does not work for anyone" and hence is looking to introduce the following measures (amongst others) to address existing concerns:
- As permitted by the LFRA 2024, the government intends to require landlords to provide a new annual report to tenants, providing detail of what is being paid for via their service charge, and key information for the year ahead, including advanced notice of major works. The consultation sets out further detail on the minimum information that would be provided in the annual report, including key contacts for those with roles of statutory responsibility for the building, such as fire safety responsible persons or Accountable Persons under the Building Safety Act 2022, and information about the building's health and condition and any anticipated works.
- The use of a standardised service charge demand form which will establish a minimum level of detail that must be provided to tenants, along with that contained in the annual report. Again, the consultation contains further detail on the proposed content of the service charge demands (with an example of the prescribed form being annexed to the consultation), including the annual budget (divided into heads of expenditure such as insurance costs, maintenance and health and safety), details of the amount payable by the tenant and any deadlines by which payment must be made.
- Powers in the LFRA 2024 allow for a new prescribed list of the
types of information that landlords must make available on
request for tenants to inspect. The information proposed
in the consultation includes surveys and reports that detail the
safety and plans for maintenance of the building, plus information
evidencing the financial management of the building, the service
charge and the buildings insurance. When it comes to timescales for
delivery, the government is proposing that all relevant information
generally be provided within 28 days of request, with extensions
only permitted in certain circumstances, such as where the volume
of information requested is particularly high. Whilst recognising
that there are circumstances in which it may not be appropriate for
tenants to be provided with requested information, the government
seems keen to limit these exceptions to (i) commercially sensitive
information and (ii) vexatious requests on the part of the tenant.
The government is seeking views on whether these and the measures
set out above should be applied to social housing tenants who pay
service charge.
Landlords may well have something to say with regards to the practicality of this information exchange, particularly on large schemes or where landlords hold a significant portfolio of assets which could see them being inundated with requests for information. - The consultation recognises that buildings insurance can often be a sizeable proportion of the sums recovered from tenants via the service charge, and that this sum should not be artificially inflated due to commissions paid to brokers and/or passed to landlords which relate to the placing of insurance. Measures in the LFRA 2024 require that landlords should proactively provide information on their insurance policy to leaseholders. Bolstered by recent regulatory changes imposed by the Financial Conduct Authority on brokers and insurers that establish a minimum level of information about the policy that must be provided to the contractual customer (ie. the landlord), including details of any remuneration they are receiving, the government are proposing that landlords provide at least the same information to their tenants. This would potentially include an additional requirement to disclose any conflicts of interest between landlords/their managing agents and their brokers or insurers.
- Whilst it can be standard practice for landlords to recover
their legal costs from tenants via the service charge (depending on
the nature of the landlord's claim and the terms of the lease),
the government has concerns that the existing regime for costs
recovery deters tenants from bringing a claim themselves, as they
may be concerned at the level of the landlord's costs that they
could be ordered to pay. The government therefore intends to
implement measures contained in the LFRA 2024 that seek to address
this imbalance and enable tenants to recover their own litigation
costs from their landlord where appropriate. Whilst not every type
of litigation cost would be subject to the LFRA 2024 regime (for
example, the costs of proceedings relating to lease extensions and
enfranchisement) for those cases where it would apply, the LFRA
2024 would imply a term into all leases which would grant the
tenant a right to apply to the court to claim their litigation
costs from their landlord, and would align the costs recovery
rights of the tenant to those which a landlord may already have
under the terms of the lease.
Whilst this attempt at parity may appear to be a more equitable approach to costs recovery, the reality is that in the majority of cases brought before the courts, it is the landlord that is seeking to address a breach on the part of the tenant, hence why the traditional position adopted in many leases has developed. As such, having to make an application to the court for the recovery of its costs from the tenant will inevitably have an impact in terms of cost to the Landlord making the application (which won't, in practice, be 100% recoverable from the tenant) and the time delay before the matter is listed for hearing. - Although not a measure anticipated by the LFRA 2024, the
government is considering mandating the use of a reserve
fund in both new and existing leases to cover the cost of
major works planned for the future. The government acknowledges
that there is a balance to be struck here between the benefit of a
reserve fund meaning tenants do not receive a huge bill for an item
of infrastructure, for example, and the fact that contributing to a
reserve fund will result in tenants paying more upfront by way of
service charge. There is also a recognition that for some
properties, a reserve fund may not be appropriate (such as where
tenants pay a fixed service charge such as in a retirement home).
Further changes to legislation are proposed to allow for an easier
route of lease variation to include obligations on the parties
relating to the maintenance and management of a reserve fund. Use
of the reserve fund will be supported by a requirement for
landlords to prepare Asset Management Plans (AMPs) for their
properties which will detail the works anticipated to be required
over a period of 5-10 years, and sanctions are proposed for those
landlords that fail to comply or produce an AMP of insufficient
quality.
The additional administrative costs and time it will take to establish a reserve fund and an AMP could be significant for landlords with portfolios of residential assets. Whilst a transitionary period is anticipated, landlords may wish to make specific representations on this requirement in response to the consultation. - Whilst the government recognises that managing agents play "a vital role in the housing market", the consultation expresses concern at the limited rights that tenants have to exert any influence over the appointment of the managing agent responsible for the building. Proposals for new rights to veto the appointment of a managing agent or to request the replacement of an existing managing agent are set out in further detail in the consultation. These proposals would grant tenants much stronger powers than those that currently exist but which can only be exercised in the event of significant failure on the part of the managing agent.
- In order to raise the standard of performance on the part of managing agents, it is proposed that new statutory requirements be introduced requiring all individual managing agents and managing agent firms to join a designated professional body, and that all agents achieve or be working towards a minimum qualification to join the body. The consultation outlines the core functions of a managing agent, but those who undertake this role in practice may wish to comment on the completeness of this summary.
For those keeping an eye on the progress of the Commonhold reform, the consultation's executive summary notes that "later this year" the government will be issuing a draft Leasehold and Commonhold Reform Bill. This will outline the new framework for commonhold ownership but will also include numerous other reforms to the leasehold system, some of which will presumably include matters proposed in this consultation.
Landlords, tenants, investors and developers of residential assets will therefore be keen to make their voices heard now by responding to this consultation (which closes on 26 September 2025) before the government presses the launch button on the new leasehold and commonhold ownership era.
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