Jul

Leasehold Reform – the biggest shake up since 2002

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In the last week before parliament closed for its summer recess the housing ministry published a raft of new policies that will affect around 4.7 million leasehold homes in England and Wales.

This move will be the biggest legal shake-up in leasehold law since the Leasehold Reform Act of 2002, and it promises to go much further in terms of reform since the inception of the leasehold principle of land ownership in Britain dating from the Middle Ages.

Where “leasehold” comes from

Leasing was established to allow ‘surfs’ to work plots of land and inhabit farmsteads for a finite period of time, and on that basis would pay the lord of the manor (landlord) by providing food and other services to those further up the social pecking order. Medieval (feudal) lease law was drafted to maintain continued land ownership in the hands of powerful families across generations, while providing comfortable livings by maximising earnings from it.

It was not until the 1920s that statutory reforms introduced Rent Acts which were meant to hold-down rents and restrict the right of landlords to evict tenants. It encouraged landlords facing dwindling returns to sell long leases (typically 99, 125 and even 999 years) for their properties. It enabled leaseholders (tenants) to occupy for long periods but never to own their properties and remains a system of tenure almost unique to Briatin.

After that the system became a convenient way for small to medium developers to provide themselves with a pension, and with the increase in construction of Flats from the 1950’s onwards, leasehold ownership increased significantly, particularly in London.

Leasehold ownership became the only way to subdivide and sell properties in a multi-occupancy and high rise apartment buildings in Britain as freehold ownership couldn’t be applied to individual units. That’s because English freehold property law is based on land and requires a separate land boundary visible on a map.

When leases expired, ownership of the land and the building reverted back to the landowner/freeholder. But further reforms followed in the 1960’s given social pressures when long-standing tenants were being threatened with eviction if they had failed to renew leases before they ran out.

In England and Wales leasehold remains by far the most common form of flat ownership and it’s still possible in 2020 for a lease to expire and a tenant to be evicted. A leaseholder would be completely stupid to allow this to happen, but nevertheless it is still possible.

New reforms from the 1960s to 2002 somewhat rebalanced the freeholder and leaseholder relationship, allowing leases to be extended by law (amid other leaseholder rights) for an additional 90 years, effectively giving leaseholders lifetime security, at a cost.

A Modern Leasehold Scandal

More recently it had become common practice for large-scale housebuilders to sell newly-built houses – many of which involved the Government’s Help-to-Buy scheme – with onerous leasehold terms, high ground rents and leases with eye watering fees, often to naive and unsuspecting first time buyers.

The practice was so beneficial to the developers, and the terms so egregious for the leaseholders that the scandal broke and brought it to the attention of the media and politicians. After a campaign by an aggrieved bunch of leaseholders it was picked up by MPs and prompted a legal review.

The developer can sell the leasehold interest of the property which makes this a very lucrative way to raise funds. The developer receives a lump sum in return for granting the leasehold interest typically to an institutional investment house, where this lump sum is roughly the vacant possession valuation of the property. The leaseholder then pays a regular payment (usually annually) to the freeholder for the duration of the lease, namely ground rent.

It is also possible for a developer to sell the freehold to a property where the developer receives a lump sum equivalent to the investment value of the property. Generally, this is the vacant possession valuation, plus earnings from ground rent payments. All this, and those wiley investors in traditional older property ground rents means there’s a large cohort of vested interests opposing changes.

Law Reform

The last Government investigated the claims of the abuse which resulted in the then communities secretary Sajid Javid promising an end to the leasehold ‘feudal practice’. He called for new rules to make extending a lease or purchasing a freehold ‘much easier, faster and cheaper’. The Law Commission was called upon to look into the subject of leasehold reform as part of its 13th Programme of Law Reform, hence the latest report.

Leasehold home ownership: buying your freehold or extending your lease

The Law Commission’s report findings stretch to nearly 2,000 pages and primarily recommends ways to make the system fairer using the ‘commonhold’ concept of what it calls a viable alternative for owning flats.

Common hold was introduced in the 2020 reforms but never took off because its terms were not attractive. However, it is used successfully in most other countries. In Australian and US condos, commonhold means occupiers own their own homes outright and common parts jointly with neighbours. The property is run by a committee of common-holders with no freeholder. Lease contracts are all standard – unlike the highly complex and unique leases at present – without the complexity that often traps leaseholders into paying exorbitant and spiralling costs.

Ministers will now need to decide whether this commonhold concept is to become incorporated into English law, whether to merely incentivise it or to make it compulsory. There are pros and cons for both systems, for although the present system can be expensive for leaseholders, a well managed block keeps everything in repair and maintains property values, without the acrimonious arguments and the management time common-holders and shared freeholders can get themselves into.

Other Recommendations

When a lease is becoming dangerously short it should be extended, otherwise a buyer would struggle to get a mortgage, making the leasehold difficult to sell. However, the cost to extend a lease or buy the freehold, known as ‘enfranchisement’, follows a complex formula to determine the Marriage Value, i.e., the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease. As the potential ‘profit’ only arises from the landlord’s obligation to grant a new lease, the reform legislation requires that it be shared equally between the parties.

Although currently leaseholders have a statutory right to extend after two years of ownership, and usually the leaseholder pays the freeholder’s reasonable legal costs, the whole process can cost many thousands of pounds. It gets a lot more expensive to extend a lease once the term drops below 80 years.

The Law Commission therefore has recommended new ways to make enfranchisement more affordable: an immediate right to extend more cheaply, and the freeholder pays their own legal fees. In addition, extensions could be for as much as 990 years (virtual freehold) instead of the present 90 years. The process would also terminate ground rent payments.

Where leaseholds currently have longer terms the tenant would be given the right to buy-out the remaining ground rent obligation nullifying any nasty rising ground rent clauses. Some of these have resulted in very high charges, for example, doubling every 10 years, making the leasehold virtually unsellable.

Currently when leaseholders want to join together to buy out their freehold, a statutory right, the process can be stymied if some of the leaseholders decline. The new recommendation is that in this case the freeholder is forced to ‘leaseback’ those flats in a block where they refuse to take part, so they pay less.

Service Charges, a pain for all leaseholders

The Commission has suggested that it should be made easier for leaseholders to take over the management of a block, taking the responsibility out of the hands of the freeholder and its managing agents and thereby helping residents to keep service charges down. This right would include buildings with up to 50% of the space devoted to commercial use, and the freeholder would pay its own legal costs.

Following Grenfell – Safety Charges

For those leaseholders occupying blocks of 18 metres or six storeys and above there’s the knotty problem of replacement cladding in many instances. Also, safety measures could include fire doors, signage and sprinklers which could cost those leaseholders affected around £9,000 each on average, but up to a maximum of £75,000. The managing agents and freeholders will in future be legally responsible for maintaining a building’s safety, but would not be liable for the cost of making it safe.

As a further concession to freeholders, as from 1^st August the planning rules are to be relaxed with permitted development rights (PDR) allowing those buildings built between 1948 and 2018 an extra two storeys of flats to be added on top. This applies to blocks with three to eight floors.

This last concession to freeholders has caused some controversy as not only will some constructions fail to meet minimum space requirements, leaseholders would face considerable inconvenience and loss of value of their own flats. This, regardless of the project being implemented as the mere right to do so will always be there, but converting to commonhold could be more expensive.

Leasehold reform in England and Wales: What’s happening and when?

Leasehold Enfranchisement – The Law Commission

Leasehold Property – UK Gov

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