The long-awaited Leasehold and Freehold Reform Bill, the second part of the government plans to reform property in England and Wales, was published on 27 November 2023, aiming to make longstanding adjustments to homeownership for millions of leaseholders in England and Wales. This significant piece of legislation aims to promote fairness and transparency for leaseholders as well as make it easier and cheaper for them to extend their leases or purchase the freehold of their property.
In this article, we explain how leasehold ownership differs from freehold ownership, highlight some of the longstanding challenges that leaseholders face, and explain the government’s plans to address these issues.
Leasehold vs Freehold
If you own the freehold of a property, you own the building and the land it stands on indefinitely and it is your name in the Land Registry as the ‘freeholder’. This is the preferred option of ownership as you won’t pay annual ground rent, and have the issue of a freeholder failing to maintain the building, or charging you huge amounts for it. However, you will be responsible for maintaining the building, including the roof and outside walls.
Buying a leasehold, on the other hand, gives you the right to live in a property for a fixed number of years in return for a lump sum payment. This arrangement is different from a regular rental, known as an assured short-hold tenancy, as the term is generally far longer (usually 99 or 125 years) but can be as high as 999 years or as short as 40 years. However, if you sell your property to someone else, the new buyer doesn’t receive a new 99 or 125-year leasehold, they will simply purchase the remaining amount of time that was left.
Under a leasehold arrangement, you cannot be evicted unless you have breached the term of the lease and the freeholder will normally be responsible for maintaining common parts of the building, such as the staircase, as well as the exterior walls and roof. In return, you will usually pay maintenance fees or service charges as well as annual ground rent to the freeholder.
Purchasing property on a leasehold effectively means that you ‘own’ the property for that term, but not the land on which it stands. However, unless you make a legal arrangement to extend it, once the lease ends, ownership of the property returns to the freeholder.
There are an estimated five million leasehold homes in England and Wales, of which 70% are flats. Traditionally, most flats have been created as leaseholds because this allows for costs to be shared. However, houses can be leasehold too, especially if they are bought through a shared ownership scheme.
The Challenges Faced by Leaseholders
There are often tensions between freeholders and leaseholders. Many leaseholders feel that their freeholder is overcharging them ground rent or increasing service charges without a reason but they are unable to do much about it. Historically, ground rent has been a very low or purely nominal amount, often referred to as a ‘peppercorn rent’. This was just a notional rent that wasn’t demanded or paid but was just included as a legal requirement of a contract. In recent years, however, the market has seen a rise in the average level of ground rent as well as ground rent terms that are structured to escalate over time, which has caused financial distress to many leaseholders. Mortgage lenders have also become increasingly cautious about providing mortgages on properties with high ground rent or ground rent that increases substantially over the term of the lease.
Other leaseholders complain that their freeholder has blocked significant alterations to the building, is not maintaining the building to a sufficient standard, or is charging extortionate fees to carry out repairs. This issue was highlighted in the wake of the Grenfell fire after which thousands of leaseholders found themselves landed with bills of tens of thousands of pounds to replace combustible cladding on their buildings. The government has since insisted that developers cover the costs for larger tower blocks but much of that replacement work has still not yet been done.
Another issue with leaseholds is that as the term of the lease decreases, the value of the property reduces. For example, a flat with a lease of 60 years is worth more than 10% less than if it had a lease of 99 years. Mortgage lenders will usually require a minimum length of term left on a lease before accepting it as security for a loan, and a shorter term is likely to make your property harder to sell. Leaseholders have been given the right to extend their lease and doing so will increase the value of their residential leasehold property. However, it can be expensive to do so and the leaseholder will have to pay a premium known as the ‘marriage value’ to the freeholder. In one example, a leaseholder was forced to pay £42,000 to extend the leasehold on his flat. Roughly, one-third of that amount was the marriage value - a cost that is applied to leases with less than eighty years remaining. In any event, this right currently only applies where a leaseholder has owned their leasehold to the property for at least two years.
What Has Been the Government’s Response?
The government has come under increasing pressure to reform the law on leaseholds to make it fairer and more affordable.
On 30 June 2022, the first part of the government’s programme of leasehold reform - the Leasehold Reform (Ground Rent) Act 2022 - came into force, abolishing ground rent payments on new residential long leases for houses and flats in England and Wales. Put simply, the 2022 Act ensures that anyone who bought a leasehold property after 30 June 2022 cannot be charged more than a peppercorn (nominal amount) rent. A long lease is defined in the legislation as a lease with a term of more than 21 years. However, the legislation did not apply to existing leases, nor did it affect business leases, statutory lease extensions, community housing leases and home finance leases.
Leasehold and Freehold Reform Bill
In 2021, the government committed to making it easier and cheaper for millions of leaseholders to extend their lease by 990 years at zero ground rent, buy their freehold and take over building management. This reform was proposed to make home ownership fairer and more secure.
At the end of last year, the government finally announced a Leasehold and Freehold Reform Bill in the King’s Speech, kick-starting some long-awaited leasehold reforms. This was later introduced to Parliament on 27 November 2023. The reforms in the draft Bill do not go as far as Housing Secretary Michael Gove’s stated intention in recent years to abolish the leasehold system but they do indicate a shift towards a phasing out of traditional leasehold.
These reforms include the following:
- Making it cheaper and easier for people to extend their lease or buy their freehold so leaseholders pay less to have more security in their homes.
- The statutory right to a lease extension for both houses and flats will be increased from 90 to 990 years.
- Improving leaseholders’ consumer rights and giving them greater transparency over matters such as service charges and scrapping the need for them to pay their freeholders’ legal costs when challenging poor practice.
- Removing the requirement for a new leaseholder to have owned their house or apartment for two years before they can benefit from these changes, makes it possible for more leaseholders to exercise their right to the security of freehold ownership or a 990-year lease extension as soon as possible.
- Simplifying the process for tenants to collectively purchase their building’s freehold, known as ‘collective enfranchisement’.
- Giving more rights to those in mixed-use blocks of flats. Currently, leaseholders in those buildings are prevented from taking over the management of the site or buying the freehold if more than 25% of its floor space is commercial, for example, where there are shops or offices on the ground floor. The government will now increase the ‘non-residential’ floor space limit to 50% so that more leaseholders can collectively own and manage their properties.
- Removing the ‘Marriage Value’ which makes it more expensive to extend leases that are close to expiry
- Enhanced rights to manage for leaseholders, enabling them to take control of their property’s management without needing to prove landlord fault, thus giving leaseholders more autonomy and potentially leading to more efficient and effective property management.
The most glaring omission from the Bill is the government’s pledge to ban leasehold tenures on the sale of newly built houses. However, it has been confirmed that the government plans to include the ban on the sale of new leasehold houses via amendments as the Bill progresses through Parliament.
Consultation on Limiting Ground Rent for Existing Leaseholds
The government has also indicated that it is considering capping ground rents payable on existing long residential leases (i.e. those in leases granted before 30 June 2022 and therefore not covered by previous legislation). It has launched a consultation and the options being considered for limiting ground rent include restricting ground rent to a peppercorn (effectively zero rent), setting a maximum financial value for ground rent and freezing ground rent at current levels.
The consultation ends on 17 January 2024 and interested parties have been invited to share their views before that date.
When Will The Changes be Introduced?
The Bill has recently undergone its second reading in the Commons and may still be subject to significant amendments as it progresses through the legislative process. For example, reports suggest that MPs may seek to amend the Bill to also abolish leaseholds for new flats as well as new houses.
Michael Gove has, however, stated that he expects the Bill to be passed by the next general election, which is expected in the second half of 2024.
If you are a freeholder or leaseholder looking to navigate these new reforms, our property team can provide expert guidance tailored to your needs. Email us for further advice.
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