Changes announced today by the Housing Secretary Robert Jenrick promise nothing short of a revolution in the market for leasehold properties.
Under our current rules, which were described by the Law Commission last year as a ‘medieval’ system characterised by high, escalating and onerous ground rents, excessive charges and profiteering by developers, freehold owners can increase the amount of ground rent payable in line with lease provisions, with little or no recourse available to leaseholders bar extending their leases under the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 93).
Peppercorn ground rent and contentious calculations
The LRHUDA 93 allows for a 90-year extension to the original term of the lease and specifies the ground rent under a statutory lease extension may only be ‘peppercorn’, regardless of the ground rent provision in the original lease.
However, arrangements to extend the lease under statute require strict adherence to a timetable and agreement between the parties of the ‘premium’ payable to the freeholder.
The calculations used to arrive at the premium are contentious and the value agreed on often makes extending a lease under statute impossible for leaseholders. If terms cannot be agreed, the matter can be taken to the Leasehold Valuation Tribunal, but the costs involved in bringing a case – and the complexity of the law in this area – tends to put off many leaseholder actions.
990-year lease extension and ground rents set at zero
Today’s changes mean both house and flat leaseholders will now be able to extend their lease by 990 years with a ground rent set at zero. It is intended that the process of extending a lease and arriving at a figure payable to the freeholder will be simplified.
For some leaseholders, the abolition of what Robert Jenrick calls “scandalous pitfalls” in the system could save them tens of thousands of pounds.
The UK’s leasehold system is not replicated elsewhere despite this type of ownership being introduced by the British to its colonies. Many other countries offer commonhold as the alternative to freehold tenure.
It was hoped the Commonhold and Leasehold Reform Act 2002 (CLRA 02) would instigate a rapid spread in commonhold ownership in the UK. However, for various reasons, including the lack of future profitability to developers in this type of development, it has never taken off.
How leasehold works
In the UK, when a property is sold as a leasehold property, the buyer does not own the land the property is built on but only leases their part which is granted out of the freehold.
Common lease provisions dictate the owner of the leasehold property has to pay ground rent to the freeholder as well as (often excessive) service charges with little or no transparency in regard to the benefit received.
Furthermore, the leaseholder has to ask for permission before making changes to the property such as adding a conservatory or installing a satellite dish, and pay a fee set by the freeholder to even consider the request.
Escalating ground rents
Leasehold properties in the UK are often flats. However, leasehold houses have also existed in the UK for many years. Historically, the owners of coal mines would build houses on their land for workers and sell the leasehold of the houses to their workers. The terms of such historic leases are rarely onerous. The issue of ground rents has really come to the fore only in the past few years.
Freeholder developers have traditionally sold long-lease houses while retaining the freehold and offered to sell this to the long leaseholder after completion of their purchase. More recently, the freehold developer has sold the freehold without giving notice to the leaseholder. The price then charged for purchasing the freehold has been set at a much higher rate than initially envisaged or suggested to the leaseholder.
Additionally, the long lease householders have been bound to pay high ground rents to the freeholder after completion and are tied in through their lease to pay high fees when requesting consent to alterations to properties or to simply ask a question of the freeholder.
The Government has noted that these costs can rack up to thousands of pounds. The Law Commission is looking at a potential right of first refusal for leaseholders of houses within the 13th programme of law reform.
Quest for transparency and fairness
Also in the spotlight is the controversial subject of ‘marriage value’, which is more often than not a prohibitive cost. The Government is keen to introduce greater transparency in the area of valuation also and is proposing an online calculator to make it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease.
Developers have acknowledged the ground rent issue. In 1917, Taylor Wimpey set aside £130m to assist those homebuyers with onerous provisions in their lease so they could switch to less burdensome leases linked to inflation. After 62 developers and stakeholders signed an industry pledge in 2019, more assistance schemes were put in place.
Robert Jenrick said being a leaseholder was “bureaucratic, burdensome and expensive” and he wanted to end the bad practices faced by homeowners. “These reforms provide fairness for 4.5 million leaseholders and chart a course to a new system altogether,” he added.
Restricted ground rent provisions will also now apply to ‘retirement homes’ – homes built specifically for older people – so purchasers of these leasehold dwellings have the same rights as other homeowners and are protected from so-called ‘fleecehold’ practices.
A way free from the leasehold trap
Mark Hayward, chief policy adviser at Propertymark, said: “The issue of escalating ground rent on leasehold homes has been a long-term scandal which has left many owners trapped and unable to sell their houses. Our research in 2018 found that 46 per cent of leasehold house owners were unaware of the escalating ground rent when they purchased their property.”
As part of the overhaul of the leasehold system, Mr Jenrick wants to increase the number of commonhold agreements, which will allow residents of apartment blocks to maintain it themselves or employ a maintenance firm to do it. Mr Jenrick is to set up a Commonhold Council of experts to decide how such an agreement would work, such as if there are freehold and leasehold residents in the same apartment block.
At present, it can cost tens of thousands of pounds to extend when a lease has less than 80 years to run. Katie Kendrick, of the National Leasehold Campaign, describes the leasehold enfranchisement process as “complex and opaque” and welcomes the demise of marriage value and the switch to fair rates.
Reform has been a long time coming
The reform of leasehold has been a thorny issue for policymakers going back half a century and more, said Mr Jenrick: “Harold Wilson’s government enabled a limited right to extend a lease and/or acquire a freehold, while Margaret Thatcher gave the right to first refusal where landlords wished to sell.
“John Major oversaw the most radical reform, enabling leases to be extended for an additional 90 years and a clear right to buy the freehold. Tony Blair provided an alternative tenure to leasehold –commonhold – in 2002 (freehold ownership of flats with joint responsibility for the common parts) but it suffered from poor legal drafting and practically zero promotion.”
Mr Jenrick said The Law Commission had recognised the advantages of commonhold and what was needed was a bold effort to make this tenure more widespread and work through the practicalities with great care. “The scandalous pitfalls of leasehold are being banished by this government, and we are putting fairness back at the heart of the housing system,” he said.
The Government has said legislation to bring about the changes to leases and ground rents will be brought forward in the coming session of Parliament, while commonhold reforms will be introduced at a later date.