The Leasehold and Freehold Reform Act 2024 introduces significant changes in how unpaid service charges are dealt with, particularly when it comes to repossession of properties due to non-payment. This reform affects both leasehold flats and freehold houses managed by Residential Management Companies (RMCs).

Key Changes Under the 2024 Act:

1. Restrictions on Repossession for Unpaid Service Charges:

• In the past, if a leaseholder or freeholder failed to pay their service charges, landlords or management companies had the ability to pursue repossession of the property. This meant that a home could be taken away from the owner after a period of non-payment.
• The new reforms limit the ability to repossess homes for unpaid service charges, and instead, management companies are encouraged to pursue other methods of debt recovery, such as payment plans or taking legal action in court.

• Under the new rules, a "Deed of Variation" is required for properties where service charges are applicable. This deed is a legal document that changes the terms of the lease or freehold agreement.
• RMCs need to ensure that their leases and freehold agreements align with the new regulations, so they are not operating under outdated provisions that would allow repossession for unpaid service charges.
• The deed essentially adjusts the provisions on how arrears are handled, ensuring that repossession is no longer an automatic or easy option for non-payment. It also clarifies the rights of leaseholders and freeholders, protecting them from losing their property due to relatively minor arrears.

• The Directors of RMCs are responsible for ensuring that the management of the property is compliant with the law. Since the new act changes how service charge arrears are handled, the existing leases or freehold terms may need to be updated to reflect these changes.
• Directors are being asked to sign the deeds of variation to officially amend the original terms of the lease or freehold agreements. This ensures that the new legal requirements are incorporated into the property’s documentation.
• By signing these deeds, RMC directors confirm that they understand and are complying with the reforms, protecting themselves, their residents, and the legal integrity of the building's management.

• Better Protection for Homeowners: Homeowners, whether leaseholders or freeholders, are now given better protection from losing their homes due to unpaid service charges. Instead, RMCs will need to explore more reasonable solutions such as payment plans or other debt recovery measures before considering serious actions like repossession.
• More Balanced Enforcement: The changes create a fairer balance between the RMCs' need to collect service charges and the rights of homeowners to remain in their homes, even if they face temporary financial difficulties.

Why It's Important for RMC Directors:

For RMC directors, signing the deed of variation is essential to ensure that their management company is legally compliant with the latest legislative changes. Without updating the documents, the company could be using outdated terms that may not align with the new law, potentially leading to legal issues. Therefore, by signing the deed, they ensure the terms for dealing with unpaid service charges are up-to-date and in accordance with the 2024 reform.

In summary, the Deed of Variation is a necessary legal step to update leases and freehold agreements to comply with the new rules around service charge arrears and repossession. This protects both the property owners and the RMC from legal complications in the future, ensuring fairer treatment for homeowners in financial difficulty.

Should the freeholder of a block of flats vary the deeds in anticipation of this?

It may not be entirely realistic or practical to ask a freeholder to change all the leases for every flat or house in one go for the following reasons:

1. Cost and Administrative Burden:

• Changing all leases at once would likely require significant legal work, as each lease would need to be reviewed, updated, and reissued with the necessary amendments. This could involve substantial legal fees, administrative costs, and time-consuming work for both the legal team and the RMC directors.
• If the building has a large number of flats, the cost and workload associated with updating every single lease could be prohibitive, particularly if the legal changes are relatively minor or specific to certain properties.

2. Practicality:

• Lease amendments typically require the agreement of both the landlord (or freeholder) and the tenant (leaseholder). Getting everyone on board to sign new leases all at once might not be feasible, especially if many leaseholders are hard to contact or unwilling to make changes. Some may also object to amendments or may be reluctant to pay for the legal costs of altering their leases.

3. Impact of Future Changes:

• Leases are legally binding contracts, so updating all of them at once may be difficult, especially in cases where there are different terms and conditions depending on the flat. Some leaseholders might have specific provisions that could complicate the process of uniform changes.

4. Alternative Solutions:

• Deed of Variation per Sale: A more practical and common approach is to make the changes on a case-by-case basis as flats are sold. This ensures that the reforms are implemented gradually, minimizing disruption and cost. When a flat is sold, the RMC would ask the buyer and seller to sign a deed of variation to amend the lease terms to comply with the 2024 reforms. This avoids the need for a massive overhaul all at once.
• The deed of variation would apply only to new owners, ensuring the leases for the existing residents remain compliant while not burdening the RMC with the cost and complexity of updating all leases immediately.

5. Legal Flexibility:

• In some cases, a clause in the existing lease may already allow for flexibility or modification under certain conditions, or it may allow changes via specific resolutions from the RMC directors without needing to rewrite every lease in its entirety.

Conclusion:

While it might sound appealing to update all the leases in one go to avoid the need for deeds of variation each time a flat sells, it’s generally more realistic and manageable to make changes as individual leases come up for sale. This approach allows for compliance with the new laws while keeping costs and administrative burden down. It also offers flexibility and is often the more practical way to handle these types of legal changes.