The Leasehold and Freehold Reform Act 2024 received royal assent on 24 May 2024. This post will provide a brief overview of how this new legislation will affect insurance fees and commissions for managing agents, landlords, and freeholders.
Leasehold and Freehold Reform Act 2024 – What Does It Involve?
The Leasehold and Freehold Reform Act 2024 applies to England and Wales, and it is designed to “improve consumer choice and fairness in leasehold”.
The act aims to achieve this through:
- Making it easier and cheaper for leaseholders to extend their leases or buy their freeholds, whether they live in houses or flats.
- Increasing the standard lease extension term.
- Making moves to abolish, or significantly reduce, ground rent.
- Improving the transparency of service charges, administration charges, and buildings insurance commissions, while giving leaseholders a right to request information about all charges related to the management of their building.
You can read a full guide to the legislation, and its aims.
Open Consultation – Permitted Insurance Fees for Landlords, Freeholders, and Property Managing Agents
The legislation addressed certain longstanding concerns that some landlords, freeholders, and property management agents may be passing on the costs of arranging and managing insurance to their leaseholders, without necessarily justifying or accounting for the work they have undertaken.
In short, some freeholders have been forced to pay significant insurance costs, and have had no power to challenge these costs, or even to properly scrutinise them. There have also been concerns that these costs may include commissions and other financial benefits for landlords, freeholders, and property managing agents that have nothing to do with the services that are allegedly being provided.
The government has launched an open consultation to find solutions to these issues. The aim of the consultation is to ensure total fairness and transparency for any costs associated with the management and arrangement of insurance for leaseholders. Leaseholders should know exactly what they are getting for their money, and they should have the power to challenge any decisions they disagree with.
Insurance Fees for Landlords, Freeholders, and Property Managing Agents – The Current Situation
Landlords, freeholders, and property managing agents are responsible for getting the right insurance in place for the properties they own/manage. Freeholders and property managing agents will usually cover the costs associated with arranging this insurance through charging their leaseholders within their service charges.
It was common for landlords, freeholders, and property managing agents to use insurance brokers to arrange for the necessary property insurance. Brokers work on a commission or fee basis, and they may choose to renumerate landlords, freeholders, and property management agents through giving them a share of their income.
This consultation was launched due to concerns that the current arrangement incentivised landlords, freeholders, and property managing agents to work with insurance brokers that promised the highest commission/income. Such an arrangement would not necessarily provide leaseholders with the best value option.
Meanwhile, leaseholders would be obliged to pay for the entirety of their insurance premiums, which often included any commissions or fees that were shared between brokers and the landlords, freeholders, and property managing agents. Plus, the lack of transparency meant that leaseholders had no power to scrutinise or challenge any decisions made about the insurance they were paying for.
What Could Change Following The Consultation?
- Landlords, freeholders, and property managing agents will be banned from charging leaseholders any costs beyond a “permitted insurance fee.”
- Excluded costs are anything related to the arrangement or management of insurance, which includes broker commissions or fees.
- The consultation proposes secondary legislation to ensure that landlords, freeholders, and property managing agents would only be able to charge leaseholders for insurance services via a separate fee, rather than as part of a variable “service charge”. This would improve transparency, and leaseholders would have the right to scrutinise and challenge any fees they are charged under the provisions of the Landlord and Tenant Act 1985.
How Landlords, Freeholders, and Property Managing Agents Can Prepare For Change?
Are you a landlord, a freeholder, or a property managing agent? Are you wondering how you might prepare for this change?
It might help to get involved in the open consultation. As well as providing an opportunity to share your thoughts, the consultation also includes a number of questions for you to consider. These might help you understand the viability of your current arrangement, along with the steps you may need to take to make your practices more transparent.
If you have any concerns about the future procedure for securing the right insurance for the properties you manage, we are here to help. We are an independent Lloyd’s broker with a dedicated team of experienced insurance professionals. We are committed to getting you the cover you need at a price you can afford, all while delivering the best possible value for your leaseholders.