Leasehold reform has been much debated in Westminster over the past years, so we’re asking: what is leasehold and why does it need reform?
Leasehold is a complex issue – it’s a huge part of property ownership, and yet many people have only a hazy understanding of what it means. That often applies even to leaseholders themselves, who might only become aware of the legal implications when they discover that they need permission from a distant freeholder before they can extend their kitchen.
Leasehold is different from freehold in that while a freeholder owns a building and the ground it’s built on in a very straightforward way, a leaseholder owns the right to reside in it for a certain number of years. A lease can last anywhere from 90 years to 999 years, and can be bought and sold multiple times over the term. Once it expires, there’s nothing left.
Mostly, houses are sold as freehold and flats as leasehold, with service charges imposed to cover costs related to common parts. Leases are complex and detailed contracts, outlining the responsibilities of the leaseholder and the freeholder relating to things like the roof, and clauses relating to rights for alterations and extensions.
There are around 4.6 million leasehold homes in England, according to estimates from the Ministry for Housing, Communities and Local Government. Most flats in the private sector are leasehold (an estimated 93% of owner-occupied flats and 73% of private-rented flats). Leasehold houses are uncommon across England, at around 8% of the stock. However, 28% of houses in the North West region are leasehold.
There’s evidence indicating that developers had started to sell new-build houses on long lease agreements as this can represent a lucrative future income stream. The proportion of new-build houses sold as leasehold rose from 7% in 1995 to a peak of 15% in 2016. The proportion has subsequently fallen and was 1% in February 2021. Around 75% of new-build houses sold in the North West in January 2017 were leasehold, compared with 8% in February 2021. The Government’s commitment to legislate against the practice of selling new-build houses on a long lease may account for this change in trend.
Leases can vary a lot and buyers need to read them carefully. It’s possible, for instance, that a top floor flat could have access to a loft hatch but in the terms of the lease, the loft could belong to the freeholder. It’s difficult to obtain mortgages for leases with less than 80 years remaining, because the price of extending a lease jumps significantly at 80 years when Marriage Values kick in, but it’s perfectly possible for the uninitiated to buy a flat without particularly noticing that there are only 85 years remaining.
Leaseholders who have owned their leases for two years or more have the right to extend their leases, or to buy the freehold. Often leaseholders in the same building can collectively buy the freehold and appoint themselves each a share; this can be a simple process, or a very complicated one depending on factors such as the length of lease remaining, and whether the freeholder is amenable. At present, ground rents determine the cost of lease extensions, which are calculated using a multiple of the annual ground rent figure, which often seems negligible. Ground rents can be anything from £10 to £500 a year, and setting them higher obviously paves the way for higher charges for extensions, and this is something that the government is pledging to change.
One suggestion is to abolish leasehold in favour of ‘commonhold’ which allows you to own the freehold of individual flats, houses and non-residential units in a building or on an estate with no limit on how long you can own the property for. The rest of the building or estate which forms the commonhold is owned and managed jointly by the flat owners (referred to as unit-holders) through a commonhold association.
In 2017 the government announced plans to tackle the growing problem of newly built houses sold as leasehold rather than freehold, and to limit ground rents on new lease agreements. Leasehold reform was discussed with the aim of finding ways to make buying a freehold or extending a lease “easier, faster, fairer and cheaper.” The Leasehold Reform (Ground Rent) Bill was introduced in the House of Lords last year, with a commitment to set future ground rents to zero from 2023. However, most of the reforms focus on new leases, and it’s still unclear what they would mean for existing leaseholders.
In the meantime, anyone considering buying a leasehold property should look carefully at the remaining term, read the contract carefully, and consider the cost of Ground Rent in the context of a future lease extension.