The UK government is conducting a consultation seeking views on its proposals to implement Part 4 of the Leasehold and Freehold Reform Act 2024 (LAFRA), as well as further proposals covering the leasehold regime.
The consultation provides much-needed clarity on the Part 4 reforms and additional leasehold regulation-focused proposals, including:
- extended rights for leaseholders to obtain information relating to building and site management and financial management on request
- application of some existing and proposed reforms available to leaseholders and renters paying fixed or variable service charges
- changes to the litigation costs regime
- powers for leaseholders to appoint a manager or replace a managing agent
- guidance on providing documents by email rather than post
- mandatory qualifications for property managers
- regulation of managing agents.
Also covered are reforms to section 20 of the Landlord and Tenant Act 1985 in regard to consulting with leaseholders on qualifying works and long-term agreements, which is significant because the current qualification thresholds for such works and agreements have not been reviewed for over 20 years.
Consultation offers more detail on standard templates
The consultation aims to clarify the structure, function and content of the standard documents proposed by LAFRA, including:
- annual reports
- service charge demands, service charge budgets, balancing charge demands, future demand notices (also known as section 20B notices under the 1985 Act), service charge accounts and related financial statements
- administration charge schedules
- insurance information.
If these are implemented, we can expect standard templates for service charge demands with budgets included in initial demands each year, as well as in section 20B notices and associated demands and in service charge accounts.
While demands for ground rent must already conform to the prescribed format, the proposed changes will require significant updates to managing agent businesses' systems and processes for issuing service charge documentation to ensure that demands and budgets in particular are compliant.
The need for a standard form of section 20B notice is justified given inconsistencies in those currently issued to leaseholders.
The case for standardising service charge demands is less compelling, in terms of the demand element, as the proposed content seems consistent with typical demands.
Headings may oversimplify existing processes
While some landlords may not currently provide annual service charge budgets – which is clearly bad practice – there are nevertheless concerns about a standard budget template, given the limited cost headings in the drafts of these documents.
Many agents have complex systems and processes in place for each service charge year, from drafting the budget to issuing year-end service charge accounts.
There are further processes for issuing demands, with the prescribed wording focused on tenants' rights and obligations and budget packs as well as linked systems for contractor management, supplier payments, accounts reconciliation and preparation of service charge accounts.
If agents are required to issue budgets using a new standardised service charge template, this could limit the information being provided to leaseholders and reduce clarity for those who are already receiving comprehensive budget packs.
These prescribed budgets may need to be produced manually alongside system-generated processes, or may require costly system upgrades.
Arguably, the only benefit to leaseholders who already receive budgets is that all these will in future follow the same format and can therefore be compared more easily – provided all agents follow the same rationale.
An alternative approach could be to standardise the budget cost headings in line with RICS' Service charges in commercial property.
Property managers may struggle to shoehorn existing cost lines into high-level headings. As such, budgets could easily become less transparent for leaseholders if costs are only recorded under such headings rather than itemised.
The budget could alternatively form part of the annual report; but if so, standard service charge demands may be of limited value to leaseholders, aside from time-restricted payments being irrecoverable following the service of a non-compliant demand.
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RICS will be engaging with the Ministry of Housing, Communities and Local Government on the proposals and will respond to all relevant consultations, publishing updates as and when it has more information.
If you are a member and would like to find out more about RICS' work in this area, please contact our knowledge team.
Annex A of the consultation provides an annual report template – a proposed new requirement for landlords, although most reports are likely to be prepared by agents on behalf of their clients.
The consultation notes state that: 'The annual report must be provided within one month of the new accounting period's start, but it can be published earlier as long as it covers the relevant 12-month period. This means that landlords could combine this report with the service charge demand if they wished, for example, to reduce costs.'
The proposed template contains fields relating to the lease terms, landlord, agent, responsible person and principal accountable person, where relevant, while the key information section covers due dates for service charge demands, buildings insurance, and the health and safety report.
Amendments to 1985 Act address leaseholder engagement
Reforming section 20 of the 1985 Act is one of the most talked about challenges of leasehold management.
Under the proposals, the current thresholds of £250 for qualifying works and £100 for qualifying long-term agreements would be increased to £600 and £300 per apartment respectively.
Further clarity on the associated costs of qualifying works would also be provided, with those that relate to major works, such as professional fees, included in the thresholds.
An existing area of concern with section 20 consultation is that the process takes three to four months and can delay instructions to contractors, which is problematic for urgent works.
The alternative option under section 20ZA, whereby landlords can seek dispensation through an application to the First-tier Tribunal, still takes time.
The consultation therefore proposes a potential exemption route whereby 85–90% of leaseholders could agree that consultation is not necessary, so as to speed up the process in certain circumstances.
Proposed amendments to primary legislation would allow landlords to establish a reserve fund, regardless of the terms of the lease, via one of three potential routes:
- requiring the landlord regularly to assess leaseholders' appetite for such a fund
- having landlords formally ask all leaseholders whether they want a fund once 50% of those living in the block support doing so
- setting a deadline by which all existing leasehold properties in England and Wales without a reserve fund should create one, save for any specified exemptions.
The proposals also contain a requirement for mandatory reserve fund provisions in new leases.
Landlords will also be required to prepare a maintenance plan for anticipated major works to a block. This would allow the cost of long-term cyclical works such as roof replacement or communal decorations to be spread across multiple years rather than having leaseholders hit with large, one-off bills.
'Reforming section 20 of the 1985 Act is one of the most talked about challenges of leasehold management'
Transparency may be improved – but at a price
These reforms aim to improve transparency for leaseholders, and throughout the consultation notes there is a focus on reducing leasehold costs.
Arguably, however, while proper consistency could improve transparency, it seems unlikely that these additional requirements will lower costs, particularly given the increased workload and costs for managing agents.
Given the scope of the consultation, anyone involved in the management of leasehold blocks and estates is strongly encouraged to take time to review the documents and provide feedback before it closes on 26 September.