Collective Enfranchisement: the upcoming changes under the Leasehold and Freehold Reform Act 2024

Collective Enfranchisement: the upcoming changes under the Leasehold and Freehold Reform Act 2024

What is Collective Enfranchisement?

Collective enfranchisement is a process allowing the leaseholders of a building to purchase the freehold of the building from the Freeholder. Collective enfranchisement gives the leaseholders control over the management of their property and can also reduce their service charge expenditure (in cases where this is managed directly by the Freeholder and not a third party).

During the King’s speech, 23 November 2023, we were introduced to the Leasehold and Freehold Reform Bill (‘Bill’). In May 2024 (following a last minute push by the outgoing conservative government) the Bill received Royal Assent, thereafter becoming legally recognised as the Leasehold and Freehold Reform Act 2024 (‘Act’).

However, it would be a mistake to assume that the changes brought in under the Act are already in force. In fact, the Act still has a long way to go before it becomes fully operational and leaseholders can benefit from its changes. The previous government had predicted that implementation would be complete by the end of 2025/early 2026. However, since the Act was passed under the previous administration, it is now up to the new government to continue its process.

Secondary legislation must be drafted to enact the provisions of the Act, and this may involve further consultations and possible additional primary legislation to address any new content or considerations.

Expected changes under the Leasehold and Freehold Reform Act 2024

While the Act is not in effect yet, we expect to see the following changes:-

1. The presumption that the leaseholder will pay the freeholder’s legal costs, when exercising their right to enfranchise, has been removed. Both parties will now be expected to cover their respective legal and valuation costs, making the process more affordable for leaseholders.

2. Previously leaseholders were required to have leased their property for a minimum of  two years before being able to apply for a lease extension or purchase the freehold. This requirement has now been removed under the Act.

3. Leaseholders will no longer have to wait 12 months before bringing a new collective enfranchisement or lease extension claim.

4. Lease extensions for houses and flats are extended up to 990 years, compared to the previous 50 years for houses and 90 years for flats.

5. Previously, the criteria for collective enfranchisement excluded properties which had  more than 25% of its space committed for commercial use. This has been changed to 50%. The change is expected to lead to a wave of new leaseholders whose properties had been previously exempt.
6. It will no longer be possible for a freeholder to defeat a claim where the freeholder intends to redevelop.
    
7. The freeholder can now be required to take a leaseback of non-participating flats.
    
8. Lease extensions in relation to houses will be at a peppercorn rent, which is in line with the current treatment of flats.
    
9. The previous National Trust exception has changed, although there is no right to acquire the freehold of “inalienable National Trust property”, there may now be a right to extend the lease (depending on the circumstances).
    
10. Cost recovery has been limited:
     
    1. Litigation costs will no longer be recoverable by the freeholder (unless an order from a Court or Tribunal is obtained); and
        
    2. The First Tier Tribunal can now (at its discretion) order the recovery of non-litigation costs incurred as a consequence of a claim notice, where:-
       • a claim fails; or
          
       • the right to manage company acts unreasonably in giving or withdrawing the claim notice.
11. The following changes are expected with regards to valuation:-

• there will be a presumed 0.1% cap on the ground rent, when valuing the freeholder’s interest.
   
• marriage value (payable by leaseholders for leases under 80 years) has been abolished.

As discussed, the changes under the Act are not yet in effect. In the meantime, leaseholders should proceed with caution and seek expert legal advice, if they are considering collective enfranchisement in the immediate future.