Leasehold reform, good and bad for landlords

Long Leasehold:

Landlords will find themselves on both sides of the divide if and when the proposed changes to leasehold laws* becomes a reality. A large number of buy-to-let landlords own flats and apartments in blocks under long leasehold and shared freehold ownership, while other landlords own the outright freeholds of the blocks for themselves.

In England and Wales leasehold ownership had been a dying form of tenure for newly built houses and flats, but in recent years it has returned with a vengeance. In 1996, just 22% of new-builds in the UK were sold as leasehold, but this has doubled to 43% today. In London, nine out of 10 new-builds are now leasehold.

The DCLG (now MHCLG) in 2017 estimated that, in 2014-15, there were 4.0 million leasehold dwellings in England in the private sector. Of these, 2.3 million dwellings (57%) were in the owner occupied sector and 1.7 million (43%) were privately owned and let in the private rented sector. There were 1.2 million leasehold houses in 2014-15 and 2.8 million leasehold flats. This represents 30% and 70% of the total number of leasehold dwellings respectively.

Following a spate of leasehold sales, which tied the leaseholders to extortionate increases in ground rents, some doubling every ten years, coming to light, the government instigated a review.

Proposed changes to flat ownership

The Law Commission has been looking into ways to make it easier and cheaper for owners of leasehold flats to buy their freeholds which have been outlined in a report.

The Law Commission’s proposals in­clude changing the way valuations are arrived at when extending leases and buying freeholds, away from the complicated formula currently used. The of this aim being to bring down prices, while still provid­ing landlords with fair compensation. It says this would also remove the requirement that leaseholders have owned their property for two years before making a claim.

The Commission also proposes to give leaseholders an additional right to buy unlimited exten­sions without a ground rent, for ex­ample, for periods of 125 or 250 years.

These new proposals come after ministers recently announced measures to ban the sale of new houses on a leasehold basis, and now this detailed study by the Law Commission. The aim is to give leaseholders more security of tenure and control over their own homes.

Law Commissioner Nick Hopkins says:

“Enfranchisement offers a route out of leasehold but the law is failing home­owners: it’s complex and expensive, and leads to unnecessary conflict, costs and delay.

“We’ve heard of untold stress caused to homeowners who have had to put their lives on hold because of issues with their leases.

“Clearly that’s not right, and our solu­tions for leasehold houses will provide a better deal for leaseholders and make sure the law works in the best interests of house owners.â€�

*About Long Leaseholds

The leasehold system of property ownership is something of a relic of English property law dating back to the 11th Century, mentioned in the Doomsday book of 1089. Freehold effectively means full, outright ownership of land (albeit ultimately, in theory at least, the state owns all of the land in the UK), whereas a leaseholder “owns� or leases for a limited period of time, for example 120 years.

In the middle ages land equated to power, and powerful families wanted to retain ownership of their land while maximising their earnings from it. The concept of leasing was established to allow tenants to work a plot of land, for a fixed period of time, on the basis that they would pay ‘in-kind’ by providing food and services to those further up the social order.

The system was to a large extent exported around the British Empire, but it’s only England that retains the purest form of leasehold, while legislation has been introduced over the years to tame to some extent the worst excesses of the owner’s power over their leaseholders.

The increase in construction of blocks of flats from the 1950s onwards resulted in increasing numbers of leaseholds, particularly in London. During that time leasehold was the only legal means available – before the introduction of Commonhold – to subdivide and sell properties in a multi-occupied buildings.

Commonhold, introduced by the 2002 Leaseold Reform Act, is a system of freehold tenure of a dwelling within a multi-occupancy building, but with shared responsibility for common services. It has never really taken off and freehold ownership cannot be applied to flats and apartments because current property law requires a separate freehold land boundary identifiable on a map.

Leases were originally sold on the basis that when the lease expired, ownership of the land and property reverted back to the landowner/freeholder. This resulted in a public outcry in the 1960s when some elderly leaseholders, many of whom had bought with no understanding of the legal process, were threatened with eviction.

This prompted legal changes to protect leaseholders. But with common issues such as excessive service charges, expensive and inadequate block management, reduction in value and the inability to re-mortgage and sell easily when the lease length reduces below around 80 years, means that many people are still very wary of purchasing leasehold property.

Even today, leasehold is by far the most common form of flat ownership and it’s still possible, though quite rare, for a lease to expire and a leaseholder to be evicted, with the property reverting back to the freeholder. A leaseholder would have bury its head in the sand for decades to allow that to happen.

Legislation introduced between 1967 and 2002 rebalanced the relationship between freeholder and leaseholder to some extent, allowing owners of leasehold flats and houses to extend their leases for an additional 90 years and benefit from other rights, providing they bought the extension following a prescribed formula.

It seems now that further leasehold reform may be on the cards following a spate of abuse by property developers selling off houses as leaseholds.

See Also:

Freehold, Shared Freehold or Leasehold?

Leasehold Advisory Service

Law Commission: Leasehold law set for radical reform

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