The leasehold reforms announced in 2024 represent a significant shift in the landscape of property ownership, aiming to redress the power imbalance often experienced by leaseholders. Central to these reforms are the sweeping changes to service charge administration, designed to inject transparency and fairness into understanding and challenging service charges in residential buildings.
The current system, often criticised for its lack of clarity and susceptibility to abuse, is being overhauled to ensure that leaseholders receive clear, comprehensive, and justifiable service charge demands. This in-depth analysis will explore the key changes introduced by the landmark reforms, highlighting the increased protections afforded to leaseholders and the greater accountability placed upon landlords and managing agents.
Standardising service charge demands
One of the most significant challenges for leaseholders under the existing system is the inconsistent and often confusing format of service charge demands. Currently, landlords have considerable leeway in how they present these demands, leading to a lack of uniformity that makes it difficult for leaseholders to compare costs and understand what they are paying for. Service charge accounts can resemble an unsolvable puzzle, which leads to stress for leaseholders avoidable disputes ending up in the First-tier Tribunal.
Existing rules are very light on what must be included within a demand, requiring just the inclusion of the landlord’s name and address, and a summary of leaseholders’ rights and obligations to be enclosed with the demand. This lack of uniformity creates an environment ripe for confusion and can obscure potentially unreasonable charges.
The provisions of the Leasehold and Freehold Reform Act 2024, set out a framework to address this issue head-on by mandating a prescribed format for all service charge demands. The layout and information required by the new form is however yet to be set out in detailed regulations, expected at some point in 2025.
Once implemented, the new form should ensure that all leaseholders receive demands that are consistent, clear, and easy to understand, regardless of their landlord or managing agent. The benefits for leaseholders and leasehold solicitors who advised them are clear; we will no longer have to learn and apply a different system for each and every block of flats we encounter.
Crucially, any deviation from this prescribed format will render any non- or late payment provisions in the lease unenforceable, providing a powerful incentive for landlords to comply. Furthermore, leaseholders will have the right to apply to the First-tier Tribunal to compel landlords to issue demands in the correct format, further strengthening their position.
Information requests: a new leaseholder right
The reforms also provider leaseholders with the right to request detailed information from their landlord or managing agent to support a service charge demand under section 57 of the Leasehold and Freehold Reform Act 2024.
Although the details are yet to be set out in Regulations, this right is expected to encompass access to contracts, invoices, receipts, and a written explanation of the decision-making process behind the expenditure. This access to information will enable leaseholders to scrutinise the costs in a way that is not currently the case.
The 18 month rule for service charges - key changes
Another area of concern under the current regime is the lack of clarity surrounding future service charge demands. While landlords are generally prohibited from charging leaseholders for costs incurred more than 18 months prior unless they have provided written notice within that timeframe, the requirement to notify a flat owner is vague and many Tribunal cases have had to decide disputes on this point, often involving large sums of money that truly affect the lives of flat owners.
The new reforms state that there will be a standard "future demand notice" that landlords will be required to serve. This notice will not only need to be in a prescribed format but will also have to contain specific information, yet to be detailed in the forthcoming regulations, to be enforceable. This change will ensure that leaseholders are kept informed of upcoming costs in a timely and transparent manner, allowing them to budget accordingly and challenge any anticipated charges they deem unreasonable.
Fixed and variable service charges: both will now be protected
Currently, the protection against excessive service charge demands is limited to those paying variable charges. Leaseholders paying a fixed service charge amount lack the same recourse. The new legislation rectifies this imbalance by extending the same protections to both fixed and variable service charge payers. This means that all leaseholders, regardless of their payment structure, will have the right to challenge unreasonable service charges in the First-tier Tribunal.
For leaseholders paying variable charges in larger blocks (the specific number of leaseholders is yet to be defined but will be set out in forthcoming Regulations), the reforms introduce further measures to ensure transparency for flat owners.
Freeholders will be required to provide detailed accounting information in a specified format at the end of each accounting period, accompanied by a written report from a qualified accountant. This report will provide an independent overview of expenditure, giving leaseholders greater confidence in the accuracy and legitimacy of the charges.
Freeholder insurance commissions
Insurance premiums, a significant part of total annual outgoings, are also subject to greater scrutiny under the leasehold reforms (and are subject to their own consultation). Commission payments to landlords and managing agents on insurance premiums will be abolished, eliminating a potential conflict of interest. Furthermore, strict timelines will be imposed for the provision of insurance information to leaseholders.
Critically, the reforms aim to limit the recoverable insurance costs to the actual premium. Additional insurance-related costs will no longer be recoverable through the service charge other than genuine claims handling services. The "permitted insurance payment" will be defined in forthcoming regulations, but the intention is clear: only the very specific charges will be permitted in future. Any charges beyond the permitted payments will be subject to challenge at the First-tier Tribunal, with leaseholders able to reclaim any overpayments and potentially claim damages.
Landlords costs in tribunal proceedings - all change
A major part of these reforms is the change regarding litigation costs. Landlords will no longer be able to automatically pass on their legal fees to leaseholders through the service charge, even if the lease stipulates otherwise
This provision overrides any conflicting clauses in existing leases. Landlords will have to justify their legal costs to the First-tier Tribunal if they seek to recover them from leaseholders who challenge service charges. Conversely, leaseholders will have the right to claim their litigation costs from their landlord if they are successful in their challenge. This change significantly levels the playing field, removing a significant deterrent for leaseholders considering legal action against unreasonable service charges.
Implementation: awaiting the regulations
While the Leasehold and Freehold Reform Act became law in 2024 as the last act of the former government, the implementation of these reforms requires detailed regulations contained within secondary legislation.
While the process may take some time, there is optimism that further legislation will appear in 2025 to early 2026. These leasehold reforms, particularly the service charge reforms, represent a crucial step towards creating a fairer and more transparent system for leaseholders, empowering them with greater control over their properties and the associated costs.