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The beginning of the end of leasehold
- AuthorRichard Carter
Leasehold property owners are set for important changes in the coming months, with the Government’s plans to grant new rights on lease extensions and the ending of ground rent.
It is may be the beginning of the end for this form of ownership, with a commitment by Government to shift to ‘commonhold’ on the horizon, but the benefits to householders are likely to take time (probably many years) to filter through.
Nearly all flats and some houses in England and Wales are owned on a leasehold basis, giving the original owner the right to live in the property for the term of the lease, commonly between 99 and 999 years. The freehold of the building may be owned by a company in which all the flat owners hold shares and have a say, but the freehold may be owned by an institutional investor, property company or an individual.
While leasehold ownership provides a means of ensuring that people who occupy flats in the same building contribute towards its upkeep and comply with common rules, there has been pressure in recent years to tackle the ways in which the system may penalise property owners. It is often difficult to obtain a mortgage when a lease has less than 80 years left to run and leases with 60 years or less left as a lease term are seen as “un-mortgagable”. Buying a lease extension will usually involve a complex process (especially if the Land lord does not agree terms) and is often expensive. Building companies have also used the system to impose high ground rents, and hefty rises in future years, with no associated benefit.
As a result, the Law Commission undertook a review and last year published recommendations to overhaul residential property in England and Wales, by reducing the number of new houses sold on a leasehold basis, empowering leaseholders to take control of their property, and encouraging commonhold as an alternative to leasehold ownership.
The Government’s recent announcement in January 2021 is in line with the recommendations, and means the leasehold system is set for a major shake-up.
First, the Government will tackle how lease extensions are granted and the ending of ground rent. It means that the millions of existing leaseholders will have a right to extend their lease by 990 years at zero ground rent. The crucial detail that we now need is the likely cost of such lease extensions.
This reform could also have the added benefit of resolving high and increasing ground rents that some Lenders are wary of. Ground rent reviews, where the ground rent can double every 10-15 years, were common amongst some house builders on new leasehold properties from 2004. Sellers of leasehold properties with such provisions have struggled to sell their flats to buyers requiring a mortgage. Often a deed of variation has been required to reduce future ground rent reviews. The new provisions would enable the current owner to extend the lease and reduce the ground rent and solve 2 potential problems at once.
The key issue now is the formula to calculate the cost of such lease extensions. The Government has said there will be a simplification of the valuation process for calculating the premium payable for a lease extension, and the Government has said that there will be an online calculator enabling leaseholders to see what they should expect to pay. The process should therefore be transparent and reduce complexity and time. The legislation will also provide for zero ground rent on new leasehold retirement properties.
There will be a shift towards commonhold, a form of ownership used in many other countries which enables residents to manage shared spaces themselves. Commonhold became law in 2004 under Tony Blair’s Government but its structures and complexity meant the concept never took off. 20 years later there are less than 200 commonhold developments in England and Wales. In practice, a commonhold will be similar to those leases where all the tenants have a share in the freehold or in the company that owns the freehold. The new reforms will reduce complexity and mean that commonhold becomes the preferred structure for many leasehold blocks.
Richard Carter, conveyancing partner of Martin Tolhurst commented: “These measures will be the biggest shake up of property law in 40 years and we welcome the announcement by the Government. While it could mean big savings for some leaseholders we await detail on the lease extension costs and if zero ground rents may be applied retrospectively, which is of particular importance to those locked into higher ground rents.
“The proposed push towards commonhold announced by the Government is a more ambitious target and it will be interesting to see how this takes shape over coming months and years. Commonhold has been an option in England and Wales since its introduction in 2004, placing ownership of a shared property under a commonhold association to represent the individual owners, but very few housebuilders have taken this route to date.”
The necessary legislation to set ground rents to zero will be put before Parliament this year, and the Government proposes to set up a council to develop an action plan towards commonhold, bringing together leaseholders, government officials and property industry professionals.
The moves are the latest to tackle unfair practices in the leasehold system and follow last year’s ban on leaseholds for almost all new build houses. While leasehold is more likely to be found in properties with shared spaces, in recent years developers had started to sell houses on a leasehold basis.
The practice saw four of Britain’s biggest housebuilders facing enforcement by the competition watchdog for potential mis-selling, on the basis that they failed to properly explain the annual ground rent or how fast it would rise. Some of the arrangements in place saw ground rents doubling every decade, with leaseholders facing annual bills for thousands of pounds and their homes rendered effectively unsellable.
Richard Carter added: “The changes are about making laws fit for the 21st century. While a fair and well-managed leasehold arrangement might be justified for multi-occupancy buildings, it is hard to defend it being used as a loophole for retaining the freehold and collecting escalating service charges and ground rents. In the longer term, all leasehold property owners are likely to benefit from the updating of the law.”
Freehold vs Leasehold
When buying freehold, you will own the property and the land it sits on.
A shared freehold means you own your personal space in the property, and generally a share of the land and the shared spaces.
With a leasehold property you buy the right to live in the property for the remaining duration of the lease, with the land, the structure of the building and shared spaces owned by the freeholder. They will hold the buildings insurance and will consult with leaseholders about any works that are required, collecting service charges from each leaseholder to pay for all maintenance and managing such work. The owner of a leasehold property is effectively a tenant in a very long-term rental, having to pay an annual ground rent and ask for consent to make any changes to the property.
Leases of between 99 and 999 years are commonly granted and generally the value of a property will reduce as the lease gets closer to the end. Lenders are unlikely to offer a mortgage on a property with anything less than 25 years left to run. If a property has only a short time left on the lease, you can ask the seller to seek an extension, at a cost.
Normally ground rent will apply only if it is a leasehold property. Ground rent can be a fixed charge or one that will change over time. While some ground rents may be very low – so-called ‘peppercorn’ – others can be substantial and have significant escalation written in.
This is not legal advice; it is intended to provide information of general interest about current legal issues. If you would like further information on the subject or have any questions please do not hesitate to get in touch on 01233 505578 or email our enquires team on firstname.lastname@example.org .