Could 2020 be the Year of Leasehold Reforms?
07 Jan 2020
For the past few years, the Government has shown substantial commitment towards reforming the residential leasehold sector to tackle “exploitative” and “unjustified” practices. Since 2017, it has run and published a number of Housing White Papers and consultations, the latest being its response to the consultation paper, Implementing Reforms to the Leasehold System in England (27 June 2019).
The Government is also working closely with the Law Commission to deliver proposals on reforming residential leasehold law to increase consumer choice, fairness within the sector, and to improve leaseholders’ experiences.
Since summer 2019, it appears the drive for reforms has slowed down. There was no mention of leasehold reforms in the Queen’s speech in October. Nor was there any mention in the post-general election Queen’s speech on 19 December, the main focus being the swift resolution of Brexit in 2020.
However, with the Law Commission continuing its body of work on leasehold reform and the general election and Brexit “deadlock” now out of the way, experts and campaigners are hopeful that legislation will finally be introduced in 2020.
What changes are on the horizon?
The main problems with the current leasehold system include the increasing numbers of leasehold houses, sub-standard property management, spiralling ground rents and disproportionate costs for owners to extend their leases. Freeholders tend to hold considerable power over leaseholders, reducing the quality of their experience. Research suggests up to 94% of house owners regret buying a leasehold house. There are good legal reasons why flats, as opposed to houses, should be held as leaseholds rather than freeholds. However, if certain technical legal problems can be overcome, it is hoped that more leasehold flats and buildings will convert to Commonhold (see below).
The Law Commission’s proposals
The Law Commission’s project on leasehold reform addresses the roots of the issues and seeks to overhaul the system to provide consumers with a better experience. It focuses on three key areas:
- Leasehold enfranchisement
Leasehold enfranchisement is the process by which leaseholders can collectively purchase the freehold of their building or extend their lease to retain ownership and increase its value. There are plans to improve access to enfranchisement, making the process quicker, easier and more cost effective.
- The right to manage
The right to manage describes leaseholders’ entitlement to take over the management of their property. Simplifying the current rules relating to the right to manage process would assist leaseholders to take control and improve their environment whenever and however they need.
Commonhold is an alternative form of ownership to leasehold. A commonhold owner owns their property (whether it be a house or a flat) outright with the rest of the building or estate within the commonhold (such as a block of flats) being owned and managed with the other owners through a commonhold association.
Commonhold has many advantages over leasehold, but currently there are issues with the law which make it unattractive to home owners, mortgage lenders and other interested parties. Therefore, the leasehold reform plans include overhauling the commonhold tenure to make it more fit for purpose.
The Government’s proposals
Parallel to the Law Commission’s project, the Government is also planning the following reforms:
Evidence suggests that in recent years it has become common for long leases to include onerous ground rent escalation clauses which can lead to ground rents doubling or even tripling over the years. Responses to the Government’s consultations clearly showed that consumers saw no benefit to ground rents other than to provide a lucrative income stream for investors and developers.
Therefore, ground rents for current leasehold properties (both flats and houses) are likely to be capped at a maximum of £10 per year. It is anticipated that ground rents for all new leaseholds will be limited to a peppercorn – zero financial value.
- Banning the sale of new leasehold houses
While leasehold is currently a suitable tenure for flats, the Government’s research and consultations have shown that there is rarely a valid reason to sell a house as leasehold. Despite this, the sale of newbuild leasehold houses rose from 7% in 1995 to 15% in 2016, presumably for the sole purpose of providing an income stream for developers.
As such, the Government plans to ban long leases (leases with a term of at least 21 years) on new build houses and existing freehold houses other than in certain circumstances, such as shared ownership properties.
The response to leasehold reform
There has been overwhelming support for leasehold reforms. The Conservative Party 2019 Election Manifesto expressed the intention to continue with Leasehold Reform.
There have of course been some protests to the proposed reforms, mainly relating to the proposed reduction of ground rents to £0 and the ban on the sale of new leasehold houses.
The British Property Federation (BPF), for example, argues that the leasehold tenure is essential for the development viability of the tenure, particularly for estates of “special architectural or historical interest”. They argue the plan to limit ground rents to a maximum of £10 is “too stringent” and would lead to freeholders exiting the market, reducing choice for consumers.
The BPF’s evaluation, however, is in the minority and it is likely the Government will push ahead with reforms in 2020.
Do you need advice about residential leasehold law?
If you own a leasehold property and/or you are thinking about buying, selling or enfranchising, our residential property solicitors can help. We provide a complete service designed to progress transactions smoothly, skilfully avoid and resolve any issues, minimise stress, and achieve your goals efficiently and cost-effectively.
Whether you require conveyancing services or you simply need some advice about leasehold ownership, we will deliver friendly advice and a personal, professional service you can trust.