Leasehold Reform | Read time 10 Minutes.
In the UK, freeholding and leaseholding come hand in hand. However, some are saying it’s time to reform the outdated structure for lease renewals and enfranchisement.
Many properties in the UK have an owner of the leasehold and a separate owner of the freehold. However, for many years, many leaseholders have heavily criticised and questioned the complex and costly nature of extending or enfranchising a lease.
Back in 2020 The Law Commission, a panel of legal experts who advise the Government, created a series of reports regarding leaseholding. These reports cover aspects such as the extortionate ground rent prices and poor property maintenance that leaseholders often encounter.
The Law Commission and the Government are currently working together to re-vamp the system. On top of that, they want to re-shape the way that leaseholds are used for new properties. Whatsmore, the Commission is stating that it is time for a change to the current system. The leasehold reform is aiming to give homeowners an easier way to buy out or enfranchise their leases.
what is a leasehold and how does it differ from a freehold?
A leasehold is the act of a person buying the right to a property for a certain amount of time. This is instead of purchasing the property outright. However, the freeholder (who manages the building) receives an annual ground rent from the leaseholder. Having a lease is one of the most common options for flats in the UK and almost 4 million homes in the UK have a lease. Interestingly, the majority of these are flats and apartments, as many houses are sold via freehold.
LEASEHOLD EXPLAINED
- While you may own or rent the property, the freeholder owns the land and the building (the majority of leaseholds are in blocks of flats or converted apartment buildings).
- You will most likely have to pay service charges, maintenance fees and ground rent fees.
- The maintenance and upkeep for the whole building is the freeholder’s responsibility.
- The leasehold grants the buyer the rights for the property for an average of between 90-100 years, although this is generally agreed between the leaseholder and the freeholder.
- You can extend your lease, but the cost to do so increases significantly over time.
- The leaseholder will have to obtain permission to have work carried out on the property.
FREEHOLD EXPLAINED
- The freeholder generally owns the property, whether it is a house or a whole block of flats. They also own the land that the property is on and the sky above it.
- The freeholder doesn’t pay any service charges or ground rent.
- They are responsible for the maintenance in the building. This includes halls, corridors, stairwells, rooves, guttering and exterior walls (the only way this would be different is if the leaseholder also has the right to manage).
- The freeholder has no lease period on the property.
- The freeholder is also responsible for choosing which contractors and workers come into the property to perform maintenance tasks.
Why do we need a reform?
The purpose of introducing a leasehold reform is down to the sheer amount of disputes and complaints that have been registered by current leaseholders over the past years and in recent months.
The most common issues noted by leaseholders include:
You are obliged to a leasehold contract
A leasehold will allow you to own your home for a certain number of years, whereas the freeholder owns the home outright. Furthermore, this means that you will have a continuous contract with your freeholder and essentially you have less control of your property.
Extortionate (and escalating) ground rent fees
The leaseholder has to pay the freeholder ground rent. Currently, most leaseholders find that their ground rent fees increase significantly over time. It can be misleading, as the ground rent fees may seem small initially, but will increase more and more as your lease goes on.
Expensive Service Charges
Service charges ensure that all leaseholders in a building contribute to maintenance upkeep. But even though leaseholders pay service charges, they often have no control over who the contractors are and often complain about costs and quality of service.
Restrictions and Applying for consent
Your lease restricts how you use your property. This means that if you want to make changes to your property you have to apply for consent from your freeholder. This process is often expensive and requests are frequently declined.
a lease is an increasingly depreciating asset
As the term that is left on your lease decreases, so does the value of your property. The shorter your term is, the harder your property is to sell, as the term will have to be renewed.
RECOMMENDATIONS by the law commission regarding the leasehold reform
The five reports that have been created by The Law Commission have asked for full leasehold reform. This includes:
- A new right for leaseholders of both flats and houses to extend their leasehold to 990 years.
- No ongoing ground rent fees.
- The right to buy out the ground rent under their lease without having to extend the length of their lease.
- Removing the requirement that leaseholders have to have owned their property for 2 years before exercising their enfranchising rights.
- Protecting the leaseholder against the unreasonable acquisition of the freehold on their home.
- Replacing the complex enfranchisement claims procedure with one simple system.
- Eliminating the leaseholder’s liability to pay their landlord’s costs.
The Law Commission’s report aims to make the process easier for people and reduce the cost to extend a lease.
The report also suggests removing “the hope value” and “the marriage value.” The hope value is the value of benefits that the leaseholders will gain when they buy from their freeholder. However, the marriage value is the increase in value of the property following the completion of the lease extension.
With these proposals, The Law Commission estimate they will remove around £6,000 from the price of purchasing the freehold.
The Commonhold Report
One of the five reports released by The Law Commission proposes using a process named “Common ownership” instead of leasehold ownership.
“commonhold is a system built upon the AUTONOMY and control that IS ASSOCIATED WITH FREEHOLD OWNERsHIP, with MECHANISMS THAT RECOGNISE THE IMPORTANCE OF COMMUNITY THat arises where properties are INDEPENDENT.”
The report, entitled “Reinvigorating Commonhold: The Alternative to Leasehold Ownership” is hoped to be a favoured method for leaseholders. However, Commonhold Ownership has no limit on how long you can own the property for and allows people to own the freehold of individual flats.
The Leasehold reform timeline so far:
| January 9th 2020 |
The Law Commission published “Report on Options to Reduce the Price Payable” – A report on options to reduce fees and prices for leaseholders.
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| July 21st 2020 |
The fifth and final discussed all aspects of reforming the leasehold enfranchisement. This was entitled “Leasehold Home Ownership: Buying Your Freehold or Extending Your Lease”.
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| October 5th 2020 |
A statement released commenting on the Government’s timeline for responding to the commission’s 5 reports over 2020 (and the 2 years before it). The Government also stated that the timing of the reform and new legislation has undoubtedly been affected by the COVID-19 pandemic.
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| January 2021 | The leasehold reform proposal is in review and will be discussed at the next Parliamentary session, where ground rent fees are set at £0. |
RESPONSE and the future for leasehold reform
This January, the Government laid out even more proposals to make it easier and cheaper for leaseholders to extend their lease. Looking to the future, the Government announced plans to ban the sale of new houses as leasehold.
This means that you can only sell flats on a leasehold basis. Most importantly, the Government will be able to consider the abolition of the hope value and marriage value and consider the establishment of a commonhold partnership. These will be the most critical factors for leaseholders, both in reducing costs and improving ownership.
The reforms could take years to become law. So, in the meantime, leasehold enfranchisement and leasehold reform will remain the same. For any more information on leasehold enfranchisement or renewing your lease, take a look at our pages or contact us today.
Unsure whether you qualify to enfranchise your lease or not? Take a look at our short flowchart below to see if you meet the criteria.
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