Recent reforms proposed by the government have altered the landholding experience dramatically. The question is: are the changes as positive as they seem?
The reforms seem to be very unclear, posing more questions than answers. With the hopes of clearing things up a little, Daniel Chard from Bird and Co. discusses.
What is a leasehold?
A leasehold property is one built on land that is not owned by the property holder. This means that a person who buys a leasehold property does not own the land it is situated on; instead they own a long lease. So, they may only own the property until the lease expires, which will be agreed in a legal agreement with the landlord.
Leasehold properties reside on freehold land, meaning the freeholder has jurisdiction over the land itself. They usually fit into the following categories:
- Homes in a shared ownership scheme
- Flats and apartments, sometimes falling under collective enfranchisement
- Social housing under a housing association
What is currently happening with leaseholds?
As it stands, leaseholders typically have to pay ground rent and service charges to the freehold landlord to occupy their home, on top of their mortgage.
Ground rent is basically a rent on the ground the property stands on. It is often fixed, but can go up if it is in the terms of the lease. Additionally, landlords have the right to demand ground rent if it is in the lease. Service charges are more flexible and are intended to cover the landlord’s costs of maintaining the property.
However, recent outcries ensued when leasehold properties started to be sold with unnecessary expenses, such as dramatic increases in ground rent, which double every 10 years in some cases. In other cases, punitive costs for extending a lease or buying out the freehold are commonplace.
There has also been anger about an increasing number of new build houses being sold as leasehold. Many argue that there is no reason for a house to be sold as leasehold, except to provide an ongoing income stream for the developer or investors – hence why many leases now contain escalating ground rent clauses.
Mark Hayward, chief policy advisor at Propertymark, commented, “that 46 per cent of leasehold house owners were unaware of the escalating ground rent when they purchased their property”. This meant that the property owners then struggled to sell their property later on.
What is the proposed leasehold reform?
To tackle these issues, the government proposed their leasehold reforms at the start of this year, in January 2021. Although they haven’t yet been confirmed, they are said to be the biggest changes to the system over the last 40 years.
The government states that the proposed changes “will mean that any leaseholder who chooses to extend their lease on their home will no longer pay any ground rent to the freeholder, enabling those who dream of fully owning their home to do so without cumbersome bureaucracy and additional, unnecessary and unfair expenses.”
But what are the key changes that have been suggested?
Flexible lease extensions
The anticipated legislation will aim to provide leaseholders with the right to extend their lease for a maximum of 990 years at zero ground rent. Right now, leaseholders are usually only allowed to extend their lease for 90 years (for flats) or 50 years (for houses). For leaseholders of houses, they could only extend their lease once for a ground rent.
It’s said that these reforms will make home ownership fairer, helping leaseholders to save up to tens of thousands of pounds.
Removing marriage value
The marriage value forces leaseholders to share any profit they make from extending their lease with their freeholder. So, if a lease has less than 80 years to run, landlords can ask leaseholders to pay them 50% of any expected property value uplift. The reforms will get rid of this obligation all together.
Ground rent caps
There will also be a cap on the ground rent payable after a leaseholder extends their lease or buys the freehold.
The reforms are also aiming to make commonhold the standard, allowing flat owners to own their properties on a freehold basis. With this, they’ll have the right to own and manage the block of flats together, in joint ownership. This will be done via the government creating a “commonhold council” to oversee things, rather than having one landlord.
At the moment, many leaseholders are kept in the dark about these increasing charges, leaving them out of control. So, an online calculator will be implemented as part of the reforms to allow leaseholders to find out how much it will cost to do any of the above. This should increase transparency.
The effects of the new leasehold reform
It remains to be seen whether these reforms will have the intended consequences. Ultimately, there has been confusion across the sector, but what can we gauge so far in terms of benefits and drawbacks?
Benefits of the leasehold reform
There is a huge list of benefits that the leasehold reforms aim to put forward. These include:
- Giving leaseholders more rights over their property
- Providing leaseholders with far more control
- Creating more transparency within the sector
- Making leasehold properties more desirable to purchase
- Reducing the disparity between the many and the few
- Making sure there are caps on ridiculous expenditures
- Saving leaseholders lots of money in the long run
- Leaseholders will be able to buy the freehold more cheaply
- More straightforward transactions
- Could give more people the opportunities to own homes with shorter leases
- Will then lead to fewer properties sitting empty, helping to deal with the housing crisis
Drawbacks of the leasehold reform
Despite the benefits listed above, many are concerned that these reforms, like many government home ownership initiatives, fall short.
The main concerns have been that it’s all come too late to really make a huge difference. People are also put off because the reforms aren’t particularly detailed, which has left even the experts rather confused.
For developers who continue to manage buildings as the landlord, the incentive to do this will be reduced if they are not getting a ground rent. They may, therefore, decide to move away from remaining as landlords, meaning more buildings are owned by the tenants, which seems great at first glance.
However, although this will suit many flat owners, there is a significant amount of people who like the fact that the building is run by a separate landlord. They may not want to be more involved in the management of the building.
What’s more, in reality, large buildings will certainly require professional management, even if they are owned by the tenants. Any Managing Agent who is appointed will be looking to make a profit, and it remains to be seen if the charges they make will represent any significant reduction on the charges currently levelled.
Also, the reforms have neglected those in the retirement home sector. The government intends to extend ground rent restrictions to new leases on retirement properties, but purchase prices to fund these extensive communal areas for retirement developments will likely rise. Although the government initially said these changes would not include this sector, these promises have been revoked.
Without the ground rent, it’s thought this will seriously impact the ability to provide older people with specialist housing.
Are the leasehold reforms all they seem?
As you can see, there are both benefits and drawbacks to the proposed reforms. Only time will tell how things will play out.
Daniel Chard is partner and head of property at the UK convenyancing solicitors Bird & Co.