The government has promised the biggest shakeup of English property law in 40 years, in a move that could save millions of leasehold homeowners thousands of pounds in years to come.
The government says reforms will make home ownership fairer and more secure, ending “cumbersome bureaucracy and additional, unnecessary and unfair expenses” for leaseholders.
New reforms confirmed on Thursday are the latest in a string of proposed changes in recent years, modernising Britain’s unusual and complex system of freehold and leasehold ownership — which has been dubbed “medieval.”
Yahoo Finance UK took a look at the key proposed reforms, what they mean for current and potential homeowners, and how long they may have to wait.
What leasehold and freehold mean
Most owner-occupied flats, some houses and all shared ownership properties are owned on a leasehold basis in England and Wales.
If a property is bought leasehold, it means the buyer does not own the property and land outright. Instead they “buy the right to live in their property for a given period” of decades or centuries.
It leaves them effectively in a tenant-landlord relationship with the landowner, known as a freeholder. There are around 4.5 million leaseholders in England, according to the government.
In a block of flats the freeholder or their managing agents will often provide common services, such as building maintenance or shared facilities, and levy charges on leaseholders for them.
The problems with leasehold
Surveys show longstanding and widespread dissatisfaction among leaseholders with their rights, freeholders and their managing agents.
Problems include the high cost of service charges, ground rent, administrative services, lease extension or enfranchisement (buying the freehold), as well as burdensome restrictions and obligations placed on leaseholders.
Some need permission to alter their properties in any way, and complain about not only poor service from managing agents and freeholders but limited ability to challenge it.
Many tower block leaseholders now face eye-watering bills for post-Grenfell fire safety work, which have also left some unable to sell or remortgage.
Phasing out ground rent
The biggest reform promised by housing secretary Robert Jenrick this week involves accelerating efforts to phase out ground rent in England.
High ground rents have become increasingly controversial in recent years, with developers selling new homes where ground rents double every 10 years.
The government this week promised legislation to set future ground rents to zero “in the upcoming session of parliament,” meaning by spring 2022 at the latest.
It means newly leased flats will be sold with no ground rent. All new houses will also eventually be sold freehold unless there are “exceptional circumstances,” ensuring new home-owners are rent-free.
For existing leaseholders, ground rent will be gradually phased out by it being set to zero whenever they exercise their right to extend the length of their lease.
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Freeholders’ revenue-raising opportunities, through charging for lease extension and including higher ground rent in the deal, will be curtailed by lengthening standard extensions.
While house leaseholders only have the right to extend by 50 years at present and flat leaseholders by 90 years, the standard term will be come 990 years.
“That is excellent,” Sebastian O’Kelly, CEO of the Leasehold Knowledge Partnership, which campaigns for reform, told Yahoo Finance UK. “It brings to an end a multimillion pound rip-off.”
He also noted looming reforms and reputational concerns had encouraged some leading housebuilders to start phasing out ground rent on new homes already.
Cutting lease extension costs
Millions of leaseholders are still likely to have to pay large sums to extend their tenures in years to come, in order to keep their properties and benefit from lower ground rent.
But as more and more leases are eventually extended by almost a millennium, the chances of future buyers having to fork out for extension will diminish.
Other reforms will help lower costs for lease extensions, however, though O’Kelly does not expect legislation beyond the ground rent ban until at least 2023.
They include clearly setting the calculation rates for lease extension or freehold-buying costs, and promoting them through an online calculator.
O’Kelly said the “brilliant” measure would limit haggling over costs and the need for expensive legal battles to determine them.
Meanwhile freeholders will eventually be barred from charging extra for extensions when leases have under 80 years to run, under so-called “marriage value” calculations.
O’Kelly urged anyone extending their lease soon to demand the “marriage value” costs be stripped out and consider taking the matter to court, given they will eventually be banned by law.
Co-owning your own home
Commonhold is an “absolutely standard” form of tenure for flats across Europe, the US and the world, according to O’Kelly.
It means buyers effectively own the freehold of a flat or property, and have joint ownership and responsibility for the rest of the block or common land with other owners.
It is little-used and little-known in the UK, despite much greater freedoms and a new law to encourage it in 2002. O’Kelly said a “powerful lobby in leasehold” had ensured proposals to force freeholders to convert all flats to commonhold by a certain deadline did not make the final legislation.
Developers have resisted using it on new sites as it offers no potential income beyond the initial sale, and also argue it is not suited to more complex developments.
The current government will seek ways to “prepare homeowners and the market for the widespread take-up of commonhold,” officials said on Thursday.
It will launch a Commonhold Council, with leasehold groups, industry and government collaborating on how to promote the ownership type.
Further details of the government’s plans are limited and legislation unlikely this year, despite promises of reform since 2017. But the government has said it will “carefully consider” plans set out in a review it ordered from the Law Commission.
The commission urged tweaking the law to make it easier for leaseholders to convert their properties to commonhold, and for developers to use commonhold models more “tailored” to specific kinds of site.