The Leasehold and Freehold Reform Bill – the latest developments in the House of Lords

Summary

Following publication of the Leasehold and Freehold Reform Bill (the “Bill”) on 27 November 2023, the Bill has been progressing through the legislative process and the latest iteration was published on 1 May 2024, showing the amendments made to date by the House of Lords following its Committee Stage which we consider further below.

The Bill will still need to be subject to a third reading in the House of Lords before being passed back to the Commons to consider the amendments made, with both Houses needing to agree the final form before it achieves Royal Assent. Nevertheless, progress continues at a relatively swift pace with Government seeking to pass the legislation ahead of the general election. The Bill does appear to have cross-party support however and accordingly an election is unlikely to materially change the outcome.

We now set out the further notable amendments to the Bill which have emerged below.

Amendments

The Bill, as amended in Committee, largely resolves typographical and formatting issues. Indeed, despite extensive amendments being tabled the Bill is relatively unchanged since the version passed to it by the Commons in February (see our previous Law-now: The Leasehold and Freehold Reform Bill – Over to the House of Lords (cms-lawnow.com)). There are however a few notable amendments as follows:

1. Consequential amendments and clarification relating to fixed service charges.
2. Amendments to the requirement to provide service charge accounts.
3. An exemption for certain items of administration charge for retirement housing landlords

Comment

Variable Service Charges

In our response to the Government’s call for evidence on the Bill, we noted that the introduction of “fixed service charges” as a regulated service charge gave rise to consequential amendments which we considered ought to be given further thought. For example, the requirement to hold service charges in trust and the ability for a leaseholder to apply to the Tribunal to appoint a manager of their building where their service charges were unreasonable. We felt that such provisions, without amendment or clarification, were not consistent with the concept of fixed service charges. This has now been clarified by the House of Lords who have included further consequential amendments to remove “fixed service charges” out of the scope of these provisions.

We consider that these amendments are sensible in the legislative context, albeit the Government may be criticised for failing to deal with the consequences of Arnold v Britton [2015] UKSC 36, a leading case where leaseholders were subject to fixed service charges which escalated (at that time) largely out of line with inflation. Giving the leading judgment, Lord Neuberger said “there may be a strong case for extending [regulation of variable service charges] to cases such as the present… but that is a policy issue for Parliament, and there may be arguments either way”.

A surprising amendment in relation to fixed service charges is that the restriction on forfeiture for non- payment of small sums has also been amended to only apply to variable service charges. Justification is given as this “preserves the current effect”, namely, this is and always has been the position. Given there has been a lot of debate regarding forfeiture of residential leases, including a tabled amendment to ban it completely, leaving this amendment out seemed like an easy win for Government in reducing the impact of forfeiture and placating campaigners.

Amendments to the Provision of Accounts

The Bill introduces new requirements to provide service charge accounts where variable service charges are payable by leaseholders. As originally drafted, the account was to be certified by a qualified accountant. This has now been amended to confirm that a qualified accountant must prepare the accounts i.e. certification alone will not suffice. To the extent that the landlord incurs costs in this respect, these will be recoverable as a variable service charge.

Exemptions of certain fees as administration charges for retirement housing

The Bill provides that landlords will be required to publish schedules of administration charges (with the detail of how it must be published to follow in Regulations). In addition, leaseholders have the right to challenge administration charges. In the latest iteration certain charges payable under retirement leases, known as “event fees” are excluded from the definition of an administration charge.

Fees payable for specified events including underlettings, a change in occupiers or an assignment of the lease, will not be administration charges where such fees are fixed or calculated by a method determinable in advance. According to Hansard, Baroness Scott of Bybrook considered that such fees would generally be “fixed service charges” and accordingly their regulation as administration charges is not required.

We are somewhat sceptical that such matters amount to a service charge. Service charge relates to the landlord’s costs incurred in “services, repairs, maintenance, improvements or insurance or the landlord’s costs of management”. If these charges are in fact fixed service charges, we do not see how there could be any differential between the types of charges payable for retirement housing and those which do not relate to retirement housing (though we accept that event fees are more prevalent in retirement housing). If fixed charges payable for these matters are in fact service charges rather than administration charges this must apply to all residential leaseholders and could consequently remove the ability for a wider category of leaseholder to challenge them as unreasonable. We doubt that this is the intention.