What changes will the Leasehold and Freehold Reform Act 2024 introduce to residential service charges?

In addition to the well-publicised changes to collective enfranchisement and residential lease extensions, the new Leasehold and Freehold Reform Act 2024 (“the Act”) will also introduce important changes to the regulation of service charges for residential long leaseholders and their landlords.

The Act has now achieved Royal Assent and, when it comes into force, it will introduce significant changes to the law governing the process of demanding service charges and the recoverability of service charges by landlords. It remains to be seen whether the secondary legislation that we expect to be brought in (no doubt with limited warning) by the next Government, will achieve the intended objectives of improving transparency and making it easier for long residential leaseholders to challenge demands for service charges made by their landlords.

The new Act and the anticipated regulations will affect all long residential leases, not just those entered into after 24 May 2024.  At a glance, these changes will include the following:

Transparency:

Service charge demands:

• A new specified form will need to be used by landlords to demand service charges from leaseholders. The form of demand will have to contain specified information in a specified manner. What exactly all the “specified” information and processes will be – remains to be seen and the all-important detail will be set out in the awaited Regulations. The Act provides that where a landlord fails to comply with the specified requirements (whatever they may be), any lease provisions relating to the non-payment (or late payment) of service charges will not be enforceable. The leaseholder will also be entitled to apply to the First Tier Tribunal to order the Landlord re-submit proper demands and/or seek damages or other appropriate remedies in respect of a landlord’s breach of these requirements.

Future Demand Notice:

• Section 20B LTA 1985, as it currently stands, provides that a tenant will not be liable to pay any service charge cost that was incurred more than 18 months before a demand for payment of the service charge was served on them unless within that 18 month period the tenant was given written notice that those costs had been incurred and would be payable as a service charge. The 2024 Act now requires a new prescribed “future demand notice” to be served. The new “future demand notice” will again need to be in a specified form, contain specified information and be given to the tenant in a specified manner – all to be explained in the forthcoming Regulations.

Equal protection for fixed and variable service charges:

• Currently the protection against excessive service charge demands is limited to leaseholders who pay a variable service charge. Some of the new changes introduced by the 2024 Act will extend this to leaseholders who are obliged to pay fixed service charges.

Accounting and reporting:

For leaseholders that pay variable service charges, the new Act will imply into the lease an obligation for the landlord to provide their tenant with a statement of account in specified form to be accompanied with a written report about that statement which is to be prepared by a qualified accountant at the end of each accounting period. The landlord’s costs of obtaining the report can be included in the service charge. For this new rule to apply, a variable service charge must be payable by a minimum number of leaseholders. The Act is currently unclear but this may be three or four leaseholders.

In the case of both fixed and variable service charges, landlords will be required to provide their leaseholders with a service charge report at the end of an accounting period and new enforcement powers will enable a leaseholder to apply to the First Tier Tribunal to hold their landlord to account where they fail to provide a report and comply with their duties.

Right to obtain information on request

Leaseholders will have the right to request information from their landlord relating to service charges and the cost of services, repairs and management relating to their building. How the process of demanding the information will work in practice and the scope of a leaseholder’s rights is yet to be explained.

Limitation on landlords ability to charge insurance costs

Under the 2024 Act, some insurance related costs (demanded from leaseholders in addition to the insurance premium) will not now be recoverable as a service charge. What will be allowed – a “permitted insurance payment” will be explained in forthcoming Regulations. Under the new provisions, where a leaseholder pays a sum as service charge which is not a permitted insurance payment, then an application may be made to the Tribunal for the return of payment and/or the payment of damages.

Landlords and managing agents will be prevented from receiving a commission payment for arranging building insurance on behalf of their leaseholders and landlords will be required to provide specified information regarding insurance within a specified time.

All change to the recoverability of litigation costs

The new Act will also introduce limits on a landlord’s right to claim litigation costs arising from a service charge challenge by leaseholders as part of the service charge. New section 20CA of the Act will turn the tables on the existing regime. The new starting point is that a landlord’s litigation costs of such proceedings are not recoverable as a service charge item and this will override any lease provision to the contrary. It will be for the landlord to persuade the Tribunal to exercise their discretion to modify this presumption. In stark contrast, leaseholders will have the right, implied into their lease, to claim litigation costs from their landlord in relation to certain proceedings relating to their lease.

The all-important detail to the 2024 Act will follow with a raft of secondary legislation that we anticipate will take some time to review and agree. We will be keeping a close eye on the Act and Regulations as they emerge over the coming weeks ahead