The potential impact of the Leasehold and Freehold Reform Act 2024 on the residential facilities management market

As reported by Beale & Co’s Kayleigh Rhodes and Antony Smith in their recent article ‘Which Bills survived the 2024 General Election announcement?’, The Leasehold and Freehold Reform Act 2024 (the “Act”) received Royal Assent on 24 May 2024[1].

The Act is the latest (and most likely the last) part of the incumbent Conservative Government’s residential leasehold reform agenda, which was launched in 2017. The Act aims to enhance the rights of residential long leaseholders in England and Wales in various ways including:

• Increasing the rights of residential leaseholders regarding service charges, insurance costs, administration charges and the provision of sales information on assignment, and reducing their liability to pay litigation costs.
• Substantively altering the legal position relating to leasehold enfranchisement and lease extensions of both houses and flats and extending leaseholder rights to manage by:
  • increasing the standard lease extension term to 990 years from 50 years in houses and 90 years in flats;
  • removing the bar preventing leaseholders from taking over the management of a site or buying their freehold if more than 25% of the floor space is non-residential (this threshold has been increased to 50%); and
  • removing the requirement for a leaseholder to have owned their house or flat for two years before they can extend their lease or buy their freehold.
• Banning the grant of long residential leases of new houses unless they are within a permitted exception.

The Act includes other reforms increasing the regulation and transparency of estate management and service charges.

Whilst the Act’s reforms (and their potential consequences) are potentially very significant, there are two important caveats to note:

1. Despite initial concern that the Act would seek to cap levels of existing ground rent and/or abolish certain compensation available to freeholders within parts of the industry, the Act stops short of this; existing leaseholders must continue to pay ground rent in accordance with the terms of their leases.
2. The majority of the Act’s reforms detailed above will only come into force upon the relevant Secretary of State enacting subordinate and secondary legislation[2]. It remains to be seen when and how the Act’s provisions will come into force, particularly given that the polls for the forthcoming General Election all seem to currently predict a change to a Labour Government on 4 July 2024[3]. Continuing the Conservatives’ residential leasehold reform agenda and/or bringing into force the previous Government’s legislation may not be a priority for a new Labour Government even though there was cross-party support for the Act as it made its way through Parliament (for more on this see Beale & Co’s Ian Masser and Joseph Roberts summarise ‘What’s next for the UK Construction Industry if Labour prevails?’).  However, Labour’s shadow housing minister Matthew Pennycook has indicated that Labour will “finish the job of finally bringing the archaic and iniquitous leasehold system to an end”[4].

Even assuming the Act is brought fully into force at some point, the potential impact of the Act’s reforms on the construction industry (most notably the residential facilities management sector) will depend upon how many long leaseholders avail themselves of the Act’s provisions.

However, those clients which operate within or serve the residential facilities management sector may wish to continue to monitor the situation. For example, how the market for works and services in that sector may shift if the Act is brought into full force (and leaseholders seek to enforce or rely upon its new provisions and/or rights). Additionally:

• The Ground Rents Income Fund plc – GRIO, a ground rent investment trust (with a portfolio of approximately 19,000 units across 392 assets[5]), described the Act as being part of a “challenging backdrop”[6] to its business model and operations, with the net asset value of its underlying holdings having been negatively impacted by the reforms.
• This reflects the concern of landlords and institutional investors alike; the Act’s reforms could see a significant loss of income and the reduction in ground rent value. The Residential Freehold Association estimates[7] that UK pension funds have more than £15 billion invested in ground rents, which are considered a stable asset that deliver reliable returns over long timeframes, and that the total value of investment in ground rents exceeds £30 billion[8].
• A reduction in ground rent income which the Act’s reforms may inevitably shepherd in would lead to many freeholders and landlords becoming insolvent and/or opting to dispose of residential holdings rather than maintaining such assets, given that maintenance may no longer be commercially appealing or even viable.
• If landlords suffered an insolvency event, this would mean managing agents and property managers would be forced to terminate their contracts with the landlord and so the usual provision and/or procurement of a residential block’s functions (from everyday maintenance, cleaning, and repair to major capex works / remediation projects) would be thrown into doubt or come to an end.
• Other industry organisations have stressed the importance of having a workable system in practice, with clarity on the likely timescales for implementation. This has been reemphasised in view of the prompt passing of the Act shortly before Parliament was prorogued in May.
• These works or services would still need to be undertaken and so the demand for the same would not diminish. However, if the Act’s reforms lead to leaseholders rather than landlords taking charge of the management of their residential blocks, at some point in the future, there could be a reset of the way residential facilities management work and services are managed or paid and procured (and by whom).
• Even if associations of leaseholders do not begin to take over the administration and procurement of residential facilities management works and/or services, the greater transparency requirements for (and ability to challenge) service charges which the Act brings in, will mean freeholders and their agents may demand greater value for money and audit rights from residential facilities management contractors and consultants.
• Clients in residential facilities management may want to consider their immediate and ultimate customers, their future order book composition, and whether the Act’s reforms (once in force) may present challenges and opportunities for them to obtain new or alternative work streams from a new type of customer or intermediary / agent.

Watch this space!

[1] Leasehold reforms become law – GOV.UK (www.gov.uk)

[2] However, the sections of the Act that amend the Building Safety Act 2022 (to further protect leaseholder rights) and deal with rent charge arrears will become law on 24 July 2024.

[3] At the time of writing (31 May 2024 at 10:43am), Ipsos Political Monitor reports a current headline voting intention of 41% for Labour compared to just 20% for Conservative.

[4] https://www.bbc.co.uk/news/articles/cw00j4x5nnyo

[5] Information as at July 2023.

[6] https://otp.tools.investis.com/clients/uk/schroder_ground_rents_income_fund_plc/rns/regulatory-story.aspx?cid=474&newsid=1826560

[7] https://residentialfreeholdassociation.co.uk/michael-goves-ground-rent-reforms-risk-backlash-from-uk-investors/

[8] The Residential Freehold Association states that the Government reported that the average ground rent was £298 per annum based on a survey in 2022.