Leasehold Reform: Where Do We Currently Stand? A Guide for Landlords
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by Property Investments UK
The Property Investments UK editorial team have been researching and writing about the UK's property market for more than a decade.
The Leasehold and Freehold Reform Bill 2023-24 is currently working its way through Parliament. Here we will look at the issue of leasehold and where we currently stand with reforming the leasehold system.
Contents
- What the Term Leasehold Means
- Why is the Leasehold System Being Reformed?
- What Has Happened with Leasehold Reform So Far?
- The Leasehold and Freehold Reform Bill – The Proposals
- What is Not In the Leasehold and Freehold Reform Bill?
- Possible Pitfalls with Leasehold Reform
- Where Are We Now?
- Will Leasehold Reform Ever Happen?
What the Term Leasehold Means
Freehold and leasehold are key terms in property ownership in England and Wales. When buying or investing in property it is essential to know whether it is freehold or leasehold.
With a freehold property, the buyer owns the property and the land it is built on outright.
With a leasehold property, the buyer is only buying the right to occupy the property for a stated number of years from its freeholder. After that time the ownership of the property reverts to the freeholder unless the lease is extended or bought for a fee.
Flats and apartments have generally always been occupied on a leasehold basis. Houses can be leasehold although it is much less likely.
Scotland does not have a leasehold system. The laws applying to property ownership are different in Scotland.
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Why is the Leasehold System Being Reformed?
Most people (except perhaps freeholders who own leaseholds) tend to agree that the leasehold system is unfair to leaseholders. They argue that leasehold is a feudal system of property ownership that has no place in a modern economy.
The main issues with leasehold are as follows:
- Leaseholders have to pay a periodic ground rent to their freeholder. This may only be a nominal amount but in some cases, it can be a considerable sum.
- In recent years something known as the ground rent scandal has emerged relating to some newly built properties. This a situation where the ground rent payable increases incrementally over time, eg. doubles every 10 years.
- Rules and regulations may affect what a leaseholder can do with their property. Leaseholders may have to get permission from their freeholders before making certain changes or carrying out certain types of work on their property.
- Leaseholders may have to pay service charges and management charges to a management company chosen by the freeholder. These charges can be high, potentially well more than what the same service could be purchased for elsewhere.
- When the lease is coming to an end the leaseholder may need to pay a substantial fee to extend the lease or purchase the freehold – a process known as enfranchisement. If they do not they lose the right to occupy their property.
- It can be difficult to sell or mortgage a leasehold property which has only a short lease remaining. If it is possible to find a buyer the value of the property may be much less because it has a short lease.
What Has Happened with Leasehold Reform So Far?
The 2017 Conservative Party Manifesto committed to reform the leasehold system. The 2017 housing white paper ‘Fixing our broken housing market’ also committed to promoting fairness and transparency in leasehold.
Some minor reforms to leasehold have already been introduced in recent years. The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022. The effect of this recent law is to restrict ground rents on newly created long leases of houses and flats to an annual rent of one peppercorn, ie. a nominal amount of no practical value.
At the time the Act was said to be the most significant change to property law in a generation.
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At the time of the Leasehold Reform (Ground Rent) Act 2022 the government pledged further reforms to leasehold. Proposals to do this have now been made with the publication of the Leasehold and Freehold Reform Bill 2023-24.
The Bill is described as "a Bill to amend the rights of tenants under long residential leases".
The Leasehold and Freehold Reform Bill – The Proposals
The new Leasehold and Freehold Reform Bill proposes several changes to the law on leaseholds in England and Wales. These can be summarised as follows:
- Leasehold reform aims to make it both cheaper and easier for leaseholders in houses and flats to extend their lease and buy the freehold. This will particularly benefit leasehold properties with only a short lease (typically regarded as under 80 years) remaining.
- Leasehold reform will increase the standard lease extension period to 990 years. (An increase from 90 years for flats and 50 years for houses as now.) It will see ground rent reduced to peppercorn rent (something of no financial value) on payment of a premium.
- It will change the qualifying criteria so that more leaseholders have the right to extend their lease, buy their freehold and take over management of their building. (Not only those who have been in their property for two years as of now.) It will also extend these rights to buildings with 50% non-residential floor space. (An increase from 25% as now.)
- It will improve the transparency of building service charges and ensure that leaseholders receive information about these charges regularly.
- It will give leaseholders the right to request information about service charges and the management of their building.
- It aims to improve the transparency of administration charges as well as the commission that building managers obtain from insurance companies.
- It will ensure leaseholders are not subject to what are called unjustified legal costs and that they can claim their own legal costs from the freeholder.
- Leasehold reform will give freehold owners who pay charges for the maintenance of communal areas/facilities on a private or mixed-tenure residential estate the right to challenge those charges/the standard of service provided.
- It aims to improve the transparency of estate charges and ensure that freehold homeowners receive relevant information regularly.
- Leasehold reform will ensure that a rentcharge owner is not able to take possession or grant a lease on a freehold property where the rentcharge remains unpaid for a short period.
The government has also launched a consultation on proposals to restrict ground rents for existing leaseholders. This could result in a ground rent cap being proposed in the new legislation.
What is Not In the Leasehold and Freehold Reform Bill?
The King’s Speech in November 2023 suggested that the new Bill would include a number of other leasehold reforms. These included: A ban on the creation of new leasehold houses (not flats). Proposals to make buying or selling leasehold property quicker and easier by setting a maximum time and fees for freeholders to provide the necessary information.
Proposals requiring freeholders who manage their building to join a redress scheme. Proposals to protect leaseholders by extending the measures in the Building Safety Act 2022. This would ensure that developers as well as freeholders are unable to avoid their liability to pay for building remediation work
At this stage, the Bill does not propose these reforms. However, the government suggests that these will be added as amendments to the Bill as it passes through Parliament.
The government has also said it wants to regulate property management agents and make the commonhold form of tenure more attractive. The Bill does not make these proposals, however.
Possible Pitfalls with Leasehold Reform
There are some possible pitfalls with leasehold reform. Institutional investors such as pension funds have traditionally invested in ground rents to provide a secure income. The government has estimated that banning ground rents could lose freeholders £5.1bn and reduce asset values by £27.3bn over 10 years. Ultimately this could affect pension holders’ pensions.
Where Are We Now?
The Leasehold and Freehold Reform Bill was introduced to the House of Commons on its first reading on 27 November 2023. The Bill then had its second reading on 11 December 2023. These readings gave MPs the opportunity to discuss and debate the new proposed law.
The next step is for the new Bill to be examined by what is known as a Public Bill Committee at the committee stage. A committee of MPs will discuss the new proposed law section by section, take evidence from experts and interested parties, and then discuss and vote on possible amendments to the Bill.
Will Leasehold Reform Ever Happen?
When and if the new Bill becomes law, the Leasehold and Freehold Reform Act will depend on its progress through Parliament. The earliest it could become law is likely to be the summer of 2024. It may also depend on when the next UK general election is. There is a possibility it may not become law before a general election. This could mean that leasehold reform could be delayed further, or even abandoned.
Even when the Leasehold and Freehold Reform Act becomes law its provisions may not come into operation immediately. The official Impact Assessment accompanying the Bill suggests some changes to leasehold law could take place in 2025 or 2026 but others may not come into force until 2028.