Few legal matters have caused as much ire in the media and amongst affordable home campaigners as the leasehold system. Once a form of land tenure spread across the British Empire, it is now almost solely confined to England and Wales. Ever since the ground rent scandal caught the media’s attention in 2017, (where developers locked tenants into contracts which could see ground rent of £200-£400 doubling every ten years, making the properties virtually unsellable), there have been calls for the system to be radically reformed. In 2019, it was announced that all new build homes must be sold as freehold and ground rents on new flats slashed to zero. And in January 2021, further leasehold reforms were announced.
What are the proposed new reforms?
The government’s proposed changes to the leasehold system are as follows:
- Leaseholders will be able to extend their leases for 990 years as opposed to the current 90 years, and ground rent following the extension will be abolished.
- Although the vast majority of landlords quote reasonable costs for leasehold extensions, a few do significantly inflate the figures. To prevent this, the government will provide an online calculator to determine how much a leaseholder will need to pay to extend their lease or buy the freehold of their property.
- The requirement to pay the ‘marriage value’ after the lease runs down to 80 years or under will be abolished. The ‘marriage value’ refers to the amount the property has increased in value since the last lease renewal. Having to pay ‘marriage value’ can add thousands of pounds to the cost of a lease renewal.
- Ground rent will be scrapped for retirement properties in order to protect the elderly.
- Leaseholders can voluntarily agree to a restriction on any future development of their property to avoid paying ‘development value’.
What is the purpose of the Commonhold Council which is being established?
Commonhold is a form of homeownership introduced in 2004 by the Commonhold and Leasehold Reform Act 2002 and Commonhold Regulations 2004. It allows people purchasing units in multi-occupancy developments to own the freehold of their home. In addition, a commonhold or residents’ association (made up of the unit owners) owns and manages the common parts of the property per standardised rules.
Under the proposed legislation, the government is to establish a partnership of leasehold groups, industry, and government. The Council will be charged with helping prepare landlords, homeowners, and the property market for the widespread take-up of commonhold tenure. It is believed that fewer than 20 commonholds have been created because of the complexity moving from a leasehold structure to commonhold and the reluctance of mortgage lenders to recognise the latter.
What should landlords and leaseholders do to prepare for the changes?
Both landlords and leaseholders will be affected by the proposed changes to the leasehold system. Freeholders, especially developers, are likely to find that the projected income from their leasehold properties will fall if the law changes. And although the changes appear advantageous for tenants at first glance, it is best to proceed with caution. With the problems resulting from the Coronavirus pandemic and Brexit, there is no guarantee that a Bill will be passed into law this year or even next. As a comparison, the government announced an overhaul of divorce laws in April 2019. The Divorce, Dissolution and Separation Act 2020 received its Royal Assent in June 2020 but will not come into effect until Autumn 2021, two years after the announcement was made.
For both landlords and tenants, it is best to seek advice from an experienced residential property solicitor before taking any action based on the government’s announcement regarding changes to the leasehold system.