08 January 2021
Government aims to reform leaseholds
Yesterday (7 January 2021) the Housing Secretary Robert Jenrick announced that millions of leaseholders will have the right to extend their lease by a maximum of 990 years at zero ground rent. These changes have the potential to save households thousands, if not tens of thousands of pounds.
Millions of properties across the UK are held under the tenure of ‘leasehold’, which means that in the first instance, a lease of a fixed term is granted, usually between 99 and 125 years, but it can be up to 999 years.
Owners of leasehold flats currently have the right to extend their leases for 90 years at a time, with zero ‘peppercorn’ ground rent. Leasehold house owners only have the right to extend their lease once, for a further 50 years. During the term of a lease, freeholders can increase the amount of ground rent, despite the leaseholder not receiving any additional benefits as a result of the extra charges.
Extending a lease can be complicated and costly, with the leaseholder paying a ‘marriage fee’ which is calculated to reflect the increase in value of the leasehold property following the lease extension. The leaseholder is also often required to pay the freeholder’s legal costs, as well as their own.
However, the implications of neglecting to extend a lease are severe; once a lease term drops below 80 years, it can be almost impossible to sell, not least because most mortgage lenders refuse to lend against a leasehold of less than 80 years remaining. Worryingly, Mark Hayward, chief policy adviser at Propertymark has stated that “46% of leasehold house owners were unaware of the escalating ground rent when they purchased their property.” These escalating ground rents, some of which double every 10-15 years, can also result in a virtually unsellable property. If a lease is permitted to expire, the leaseholder no longer has the right to occupy the property which can lead to significant practical and legal issues.
This is therefore a seminal reform to the leasehold system; owners of both leasehold flats and houses will be permitted to extend their lease to 990 years with zero ground rent, thereby protecting themselves from escalating ground rent, and creating a more marketable property. Under the government’s plans, the ‘marriage value’ will be abolished, with the aim of making extensions more affordable and transparent.
Further measures will be introduced to protect the elderly, with ground rents reduced to zero for new leases on retirement leasehold properties (purpose-built for older people). Purchasers of these properties will have the same rights as other homeowners and will be offered the same protections.
As an alternative to the leasehold system, the Law Commission has recommended the Government to set up a ‘Commonhold Council’ to prepare the homeowners and lenders for the transition to the commonhold model in the UK. Under the commonhold system, homeowners own their individual property on a freehold basis, while sharing the ownership and maintenance of the building or block of flats with the owners of the other households. People therefore gain control over their property, rent and future developments, however it does require co-operation with the owners of other flats or houses in a block, which can be practically challenging at times. Currently, many lenders are nervous of lending against commonhold properties, however if the commonhold tenure becomes more prevalent in the future, this may become less of an issue.
While this reform has been hailed by many commentators as hugely beneficial for leaseholders, some campaigners have said that the measures do not go far enough, and that leaseholders should be retrospectively compensated for the high costs of their leasehold properties. For now at least, it seems that the government has made a positive step in the right direction, even if there is still a way to go for full leasehold reform.