Navigating new horizons: The impact of the Leasehold and Freehold Reform Act 2024 on mixed-use premises and the right to manage

Summary  

All mixed-use premises where the non-residential element does not exceed 50% will, from 3 March 2025, be susceptible to claims from long residential leaseholders for the right to manage the premises, following the ongoing implementation of the Leasehold and Freehold Reform Act 2024 (“LFRA 2024”).

As well as an increase in buildings in the scope of the right to manage, landlords will be unable to recover their legal costs in most cases when assessing or resisting a right to manage claim.

Detail

LFRA 2024 was given Royal Assent on 24 May 2024, having been rushed through the final stages to become law ahead of the dissolution of Parliament (The Leasehold and Freehold Reform Act is here (just)). Since then, and now under the care of the Labour Government, the significant reforms brought about by LFRA 2024 have been relatively stagnant, with Matthew Pennycook MP (Minister for Housing and Planning) indicating in his November statement that LFRA 2024 “contains a small number of specific but serious flaws” and that the new Government “intend to work at pace, [but] will take the time necessary to ensure the reforms we pass are fit for purpose”.

From 31 October 2024, amendments to the Building Safety Act 2024 were commenced including new rights to require those responsible for buildings to take “relevant steps” relating to certain defects in premises, as well as extending the ability to recover expenditure. From 31 January 2025, the requirement to have owned a lease for two years before exercising the right to a lease extension of a flat, or to extend the lease or acquire the freehold of a house, has been removed.

The Leasehold and Freehold Reform Act 2024 (Commencement No. 3) Regulations 2025, published on 6 February 2025, will bring into force amendments to the Right to Manage regime in the Commonhold and Leasehold Reform Act 2002 (“CLRA 2002”) from 3 March 2025.

Under CLRA 2002, leaseholders of mixed-use buildings cannot exercise the right to manage such buildings unless the non-residential internal floor area does not exceed 25%. This will increase from 3 March 2025 to 50%, meaning more buildings will now be in the scope of the right.

Many buildings were specifically developed after CLRA 2002 to allow for non-residential floor area sitting above 25% but at or below 50% with a view to avoiding the effects. Those buildings will now be liable for acquisition of the right to manage.

In addition to a change in the floor area, landlords will in most cases be unable to recover their costs of dealing with these claims. LFRA 2024 amends CLRA 2002 such that costs can only be claimed in limited circumstances, including:

1. Where a court or tribunal has the power under another enactment to order the payment of costs and it makes such an order;
2. Where each of the following conditions are met:
   1. The claim notice is withdrawn or ceases to have effect;
   2. The RTM Company acts unreasonably in giving the claim notice, not withdrawing it or causing it to be deemed withdrawn, or causing it to cease to have effect sooner;
   3. The costs are incurred before withdrawal, deemed withdrawal or ceasing to have effect;
   4. The costs were not incurred in connection with proceedings before a court or tribunal; and
   5. The costs are reasonably incurred.

As well as the LFRA 2024 reforms, new model articles for RTM Companies are being introduced from 3 March 2025. This limits the rights in the RTM Company available to freeholders and intermediate landlords, with an overall cap on voting rights of 1/3^rd of the votes exercisable by qualifying tenants for any landlords of the whole or any part of the premises. This is to prevent a mixed-use building being ultimately controlled via the RTM Company by the people from whom the right to manage has been claimed.

What is next for Leasehold Reform?

Most of LFRA 2024’s major reforms remain outstanding, including the ban on the sale of leasehold houses, reforms to the enfranchisement regime and reforms to the service charge regime (with ongoing judicial review proceedings relating to some of these reforms). As yet, we have not seen a draft Leasehold and Commonhold Reform Bill which is due in this parliamentary session.

That said, the timeline set out in Matthew Pennycook’s November statement has thus far been adhered to, so if that continues, we can expect consultations on service charges and the wider reforms to legal costs shortly.

In the meantime, we anticipate that right to manage claims will be pursued imminently in respect of a number of buildings where there is fractionally above 25% non-residential floor area, being buildings where leaseholders have investigated this process before but been prevented owing to the existing non-residential limit. Over time, we would expect to see a shift towards right to manage claims of buildings containing nearer to the new 50% non-residential limit, as leaseholders mobilise following the extension of their rights.

It remains to be seen whether the new restrictions on landlord’s costs will lead to an increase in claims. Leaseholders will still of course need to pay their own costs and garner sufficient support from other leaseholders within their building, both elements representing challenges not made easier by LFRA 2024.