Call +44(0)161 941 4000
Call +44(0)161 941 4000
‘Across the country people are struggling to realise the dream of owning their own home but find the reality of being a leaseholder far too bureaucratic, burdensome and expensive.’ Rt Hon Robert Jenrick MP, Housing Secretary.
In July 2020, the Law Commission published its reports on the areas for reform of both the leasehold and commonhold schemes of ownership, you can read about their recommendations here. Earlier this month on 7 January 2021, the Government announced new measures which enact many of these proposals, to the benefit of leaseholders across England and Wales. These measures are part of one of the biggest reforms to English property law in 40 years. They form a decisive step towards a fairer system of home ownership and away from the ‘feudal’ system which has historically prejudiced leaseholder’s interests in the property market.
There are three key changes:
Both flat and house owners are now able to extend their lease to a new standard 990 years with a ground rent of £0.
Previously, leaseholders of houses were only allowed to extend once for 50 years and leaseholders of flats were allowed to extend multiple times for 90 years. As such, this change not only reduces costs, by removing the need to repeatedly extend short leases, but also makes it consistent across the board. Costs for the leaseholder are also reduced dramatically by the cap on ground rent, as they will no longer have to pay any ground rent to the freeholder upon extending their lease.
The enfranchisement process has been criticised in the past for being costly, complex and lacking in consistency; the new measures attempt to tackle these problems by reducing the costs involved and increasing transparency and standardisation of the process.
An online calculator will be introduced so that leaseholders may check how much it will cost to buy their freehold or extend their lease, as the calculation rates have now been set by the Government. Previously, the level of ground rent determined the cost, but now the ground rent has been capped.
There were concerns over standardising the valuation process: one obvious result is that tailor-made assessments of lease values are replaced by generic valuations, which could mean a loss in value upon extension. Another result is that ‘marriage value’ is eliminated, which is the increase in value of a lease once it has been extended, paid to the freeholder when extending a lease. Leaseholders will also be able to agree to a restriction on future development of their property to avoid paying ‘development value’ – the value of any potential development a leaseholder can carry out following enfranchisement.
Of course, what benefits the leaseholder may well disadvantage the freeholder: in this case, leaseholders are now free to extend without paying marriage value, thereby diminishing the amount paid to the freeholder for their property. However, this change is necessary in order to give more options to a leaseholder for the ownership of their home, as previously costs such as marriage value could be prohibitive, and in order to increase the fairness of the leasehold system overall, as it currently prejudices the interests of leaseholders.
The Government has also committed to restrict ground rents to zero on all new leases, including retirement leasehold properties, which are homes built specifically for older people. Once again, this demonstrates the Government’s commitment to increasing fairness across the board, regardless of the type of leaseholder or property involved. It should be noted, however, that this measure applies only to new leasehold retirement properties and not existing ones.
Escalating ground rents formed a major part of the leasehold scandal. Many leaseholders were unaware of escalating ground rent provisions in their leases when they purchased their properties, which rendered it difficult to obtain mortgages and were unattractive to buyers, effectively trapping them in their homes. It does not come as a surprise that this is one of the first areas the Government has looked to enact change.
Finally, the Government will establish a ‘Commonhold Council’ to prepare the housing market for the widespread take-up of commonhold, which will be comprised of leaseholders, government officials and property industry professionals.
Commonhold is a form of freehold title, allowing owners to own their flats forever without a landlord and to pass on positive obligations to future owners, comparable to strata title in Australia and condominium in the USA.
The Law Commission’s recommendations concerning commonhold aimed to reinvigorate it as the alternative form of home ownership to leasehold across England and Wales. In the past, the vagueness of the legislation led to uncertainty over its implementation and a consequential lack of confidence in it as a system. Since its introduction in 2002, fewer than 20 new commonhold builds currently exist. As such there is a decided lack of awareness around commonhold as an option for leaseholders, which will have to be addressed by the Commonhold Council. Steps will also have to be taken to encourage developers to back commonhold, as it is a relatively untried and untested form of ownership in comparison to leasehold. However, as other countries have shown, there is no reason why it shouldn’t work if enough industry players get behind its take-up.
No timetable has been published yet for the reforms to be implemented, but some will be pushed forward in the next Parliamentary session. Given many government resources have been diverted to deal with the global pandemic there may be more delay than usual in turning these reforms into law. In terms of valuation, there has also been no explanation as to how valuations would be calculated further to the removal of marriage value. With these reforms on the horizon, leaseholders may hold off exercising their right to enfranchise under the current legislation in order to benefit from the more favourable proposed system. A further response covering the remaining recommendations of the Law Commission will follow this.
These measures realise the Government’s previous commitment to take steps to address the perceived unfairness of the current leasehold system. Of course, there will have to be further and significant reform to truly create a fairer system with security in home ownership across the board, but this is a step in the right direction for leaseholders.
If you have any more questions regarding these changes or if you would like further information on how we can help, please do not hesitate to contact a member of our Real Estate team. You can also contact us via email or by calling us on 0161 941 4000.