Last call for leaseholds?

The Background

The Law Commission published three reports earlier in July 2020 which set out a series of proposals to reform the leasehold system in England and Wales. The Law Commission was asked to look into the issue of leasehold reform by the government after former communities secretary Sajid Javid promised (in 2017) to make extending leases and purchasing a freehold ‘much easier, faster and cheaper.’

The leasehold system has been criticised for many years, but most recently for the ‘ground rent scandal’, where homeowners had unwittingly bought homes with ground rents which would double every ten years, making them almost impossible to mortgage. Most recently, campaigners have focused on cladding issues as an example of why the current leasehold system is ‘unfit for purpose.’

The government has now responded to The Law Commission’s recommendations and has announced it intends to adopt some (but not all). The key ones to be aware of are:

(i) Extending a lease

Currently, leaseholders of houses may only extend their lease once for 50 years with a ground rent payable. Leaseholders of flats can extend their lease more frequently, and for up to 90 years with zero ground rent. The legislation aims to give both types of leaseholder the ability to extend their leases to a new standard 990 years, with no ground rent.

The ‘marriage value’ (a fee based on the increase in the property’s value with the new lease) will also be scrapped and replaced with ‘fairer charges’. Although these charges have not been specified, the government has announced it will introduce an online calculator which will allow people to find out the cost of extending their lease. This will undoubtedly make the process of extending a lease more transparent, although it remains to be seen how ‘fair’ these charges will be.

(ii) Ground rent on retirement properties

The government has also announced it intends to ban ground rents for all new retirement properties, which was cited by housing secretary Robert Jenrick as ‘rip-off practices.’ There are few details on this element of the proposed changes, however Propertymark’s chief property adviser has suggested the organisation will lobby for ground rents to also be abolished on existing retirement properties.

(iii) Introducing Commonhold

The government will establish a ‘Commonhold Council’ to advise homeowners and the financial industry on rolling out the commonhold model. This will allow residents of flats to jointly own and manage their building, including the right to appoint a management company of their choice.

Commonhold was introduced in England in 2002 but is not used widely in England (however it is more popular in Scotland and other European countries). Robert Jenrick has described the existing commonhold tenure as having ‘poor legal drafting’, suggesting the government intends to replicate the existing legislation.

The ultimate aim is to eventually phase out the leasehold system altogether, but it is important to note this will likely be a very gradual process.

Next steps

The government has stated it intends to bring forward legislation in the upcoming parliamentary session (which begins on Monday 11 January). The reforms are expected to be covered in two separate bills: one for ground rent, and one for commonhold and the other remaining changes. Ground rent legislation will be laid before parliament first, with the second legislation following ‘in due course.’

The legislation will have to move through several stages of debate, which is often time-consuming. MPs and members of the House of Lords will also have the opportunity to suggest amendments to the bill, which means there could be changes between the draft legislation and the bill which becomes law.

Anyone familiar with the passage of bills through parliament will know that the process is often painfully slow, with lots of waiting for the government to schedule time for each reading. 

To summarise…

These reforms represent the biggest changes to property law in almost half a century. While the announcement has been welcomed by housing campaigners, there is likely to be some resistance and lobbying from the industry. Leading figures from the retirement living sector have already expressed disappointment at the proposals, as they consider ground rents essential given the amount of upkeep of communal areas which is required in retirement living schemes.

After years of stalling, the government does now seem committed to reforming the leasehold system, although it should be noted that the proposed changes will take several years to implement. This will either be welcome news or incredibly frustrating depending which side of the debate you are on. A full replacement of the leasehold tenure with commonhold is likely to take decades. There also many aspects which will need to be ironed out – the devil as they say, is in the detail.

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