NARA Training Days 2025 – Leasehold Reform (cont.)

Overview of session

In this second session on leasehold reform, we are going to look at some specific aspects, focusing on service charge recoverability and Mark will then discuss where we are with Commonhold and proposed reforms to that area.

In respect of service charges, in particular the key changes that will affect receivers appointed over both freehold and leasehold property and consider some of the practical implications.

Service charges – current position

I am going to concentrate on an overview of the reforms and the key take aways however there is a lot going on in this space and it is not limited to the Leasehold and Freehold Reform Act 2024 (LAFRA).

LAFRA aims to improve the rights of residential leaseholders in England and Wales and one of those is by increased regulation of service charges.

The current position is as per the Landlord and Tenant Acts 1985 and 1987 and these provide several key rights for residential tenants for example:

• landlords can only include costs in the service charge to the extent they were reasonably incurred and works or services were carried out to a reasonable standard

• Tenants do not have to pay for service charges that were not demanded with the correct information or within the statutory deadline

• Tenants can apply to the Tribunal (First Tier Tribunal in England and Leasehold Valuation Tribunal in Wales) for a determination as to whether the service charge is payable

However, these current rights only apply to a service charge that is variable according to the relevant costs and so disputes have typically emerged when tenants challenge the fairness, transparency or legality of the charges being imposed by landlords or managing agents. Often relating to allegations of overcharging, poor quality of services, lack of documentation and/or historic neglect.

LAFRA aims to substantially improve the rights and to make significant changes however most of the relevant provisions are not yet in force.

The changes are intended to apply to all long residential leases, whether the lease was granted before or after the provisions come into force (section 71 LAFRA 2024).

A service charge is a fee paid by tenants to a landlord for services provided like maintenance, repairs, insurance and management costs for communal areas. These are often variable, depending on the costs incurred and the provisions for recovery are set out in the lease.

Headline changes – service charges

The proposed headline changes to service charge recoverability:

• The 1985 Act is to be amended to include new protections for tenants and some of these are to be extended to fixed service charges as well as variable
• A prescribed form of service charge demands is to be introduced as well as a future demand notice, meaning a prescribed format, which is to contain specific information and to be given to tenants in a specific manner
• Statements of account and annual reports are to be introduced and to be provided by landlords
• Tenants will have a new right to require information regarding the service charges, which landlords will be obliged to provide within a specified time if the information is in their possession
• The new landlord obligations in relation to service charge demands, annual reports, or requests for information will be enforceable on application by the tenant to the Tribunal for an order for specific performance and damages of up to £5,000
• Certain insurance costs connected with arranging or managing insurance will be prohibited from inclusion in a variable service charge. Apart from the insurance premium, only permitted insurance costs, which will be defined in regulations, will be capable of inclusion. These permitted costs are likely to be limited to a reasonable handling fee for placing and managing the insurance, taking account of the work and time spent
• Landlords will be required to publish an administration charge schedule, ideally specifying the amount of each charge. If publication of a charging schedule is not possible, landlords must provide details of how the amount will be determined
• Landlords must obtain a court or tribunal order before passing on litigation costs to either individual tenants as an administrative charge or to all tenants as part of a variable service charge
• A landlord's recovery of non-litigation costs in connection with enfranchisement, lease extension or Right to Manage claims through a variable service charge will now be prohibited
• A tenant who is contemplating selling will have the power to give its landlord a sales information request

Prescribed form of service charge demand and future demand

For demands there will be a prescribed format, with the information to be included and how the demand is to be given to tenants. The current requirement under the 1985 Act which obliges a landlord to provide a summary of rights and obligations with each demand will be repealed.

The existing obligation to provide notice that further charges may be due within 18 months of the charges being incurred will be altered to require a future demand notice to be given. This must be given to tenants within 18 months of costs being incurred in order that those can be subsequently recovered. The regulations may specify the form of this notice, information to be included and the manner of service.

A failure to comply will render any provisions in the relevant lease regarding late payment or non-payment of service charges of no effect.

Therefore, where applicable, you will need to ensure that existing procedures and documentation are reviewed and updated once these provisions are in force. Similarly, where receivers are appointed over leasehold property and demands are made by the landlord, these will need to be scrutinised and if necessary, challenged for compliance.

Litigation costs

Currently a landlord’s ability to recover costs often depends on the wording of the relevant lease and tenants can apply to the court or tribunal for an order preventing the landlord from passing these on through the service charge.

When these provisions are in force, a landlord will not be able to recover their litigation costs from tenants unless they have obtained an order from a court or tribunal. Any clause in a lease that automatically allows a landlord to demand litigation costs will be ineffective.

The court or tribunal can make an order if all of the following apply:

• It is just and equitable to do so
• The costs do not relate to enfranchisement, lease extension proceedings or an RTM claim
• The litigation costs would either be included in the variable service charge, or be an administration charge payable by the tenant, were it not for the new restrictions preventing this

The intention is to rebalance the current system where the fear of incurring the landlord’s potentially high legal costs often deterred tenants from challenging unreasonable charges.

Tenants will be given a new right, by an implied term in their lease, to give them the right to claim their own litigation costs from landlords in connection with relevant proceedings relating to their lease. The court or tribunal can make such order as it considers just and equitable in the circumstances.

Non-litigation costs

A landlord's recovery of non-litigation costs in connection with enfranchisement, lease extension or RTM claims will be prohibited. Provisions in the lease permitting recovery will be unenforceable.

Where a prohibited sum is paid, on application by the tenant the Tribunal can order its repayment – s.64 LAFRA.

In relation to RTM claims only, this is already in force from 3 March 2025 under the Leasehold and Freehold Reform Act 2024 (Commencement No 3) Regulations 2025 (SI 2025/131).

Again, whether appointed over freehold or leasehold property, current procedures will require amendment or demands to be scrutinised to ensure a landlord is not trying to recover costs which are or will be prohibited.

Leasehold sales information

Where a tenant is contemplating selling, they will have the power to give their landlord a sales information request that will assist a potential buyer. The regulations will specify what the request will cover however it is likely to include details on service charges, administration charges, building insurance and building safety.

A landlord will be obliged to provide the requested information and, if necessary, request the information from a third party whom it believes has it.

If the third party does not have the information, they will be obliged to make a further onward request themselves for the information from the party whom they believe has the information.

A party who receives the information sales request or an onward request but does not have the information must provide a negative response within a specified time. There will be a prescribed form of negative response requiring an explanation of steps taken to ascertain the information and an explanation as to why the information is not held, which may well be the case on many receiverships.

Time periods will apply at all stages of the request process and the regulations will set limits on charges that can be incurred. Any charge must be treated as an administration charge and not part of the service charge.

The rights will be enforceable on application by a tenant to the Tribunal, who can order compliance, damages and repayment.

In terms of next steps on the proposed provisions to service charges, it is unclear when implementation will now take place, and we will have to see what details are in the secondary legislation when it follows. However, LAFRA is in writing and final and so these changes are coming as we await the commencement of relevant statutory instruments.

November 2025
Kate Hillman
Managing Associate, TLT LLP

Mark Routely
Partner, TLT LLP