Housing Secretary Robert Jenrick is set to overhaul the controversial and expensive leasehold ownership system of flats and houses in England.
Landlords are among the homeowners expected to benefit from the changes that affect around 4.5 million properties.
Many faced paying thousands of pounds in ground rents that doubled every 10 years and fees if they wanted to improve their homes.
Leasehold costs also blight house prices, particularly if the agreement has less than 100 years to run.
Many homeowners complained about sky high fees they had to pay to extend their leases.
The minister’s move follows a long and complex legal investigation by the Law Commission that looked at the best way to change the law.
What is a leasehold?
The person who owns a property and the land it is built on is a freeholder.
With a leasehold home, the owner leases the property from the freeholder. The lease also gives them a right to use the land the home stands on.
But if they want to make any significant changes, they must ask the freeholder’s permission – and any agreement often comes at a price.
The leasehold generally lasts between 99 and 125 years but can stretch to 999 years. Extending the lease or buying the freehold is costly.
“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,” said Jenrick.
“We want to reinforce the security that home ownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners.”
“These reforms provide fairness for 4.5 million leaseholders and chart a course to a new system altogether.”
How are leaseholds going to change?
Current laws allow house leaseholders one chance to buy a 50 year extension to the lease while continuing to pay ground rent.
Flat leaseholders have slightly different rules that allow them a 90 year lease extension as often as they like paying no ground rent.
The new law will give leaseholders the right to extend their lease by 990 years without continuing to pay ground rent.
The government is also backing commonholds, a legal set-up that allows a group of leaseholders, like the owners of flats in a block, the right to own the property as a freehold. This gives them the chance to control the costs they pay for the upkeep of the building and common areas.
Professor Nick Hopkins, Commissioner for Property Law at the Law Commission said: “We are pleased to see government taking its first decisive step towards the implementation of the Law Commission’s recommendations to make enfranchisement cheaper and simpler.
Marriage values scrapped
“The creation of the Commonhold Council should help to reinvigorate commonhold, ensuring homeowners will be able to call their homes their own.”
Other changes include:
- A cap on ground rent due when a leaseholder chooses to buy the freehold or extend their lease.
- An online calculator will let leaseholders see how much it will cost them to buy their freehold or extend the lease.
- ‘Marriage value’ costs will be scrapped, and calculation rates made fairer, cheaper and more transparent. The marriage value assumes the value of one person holding the leasehold and freehold interest in a property is greater than when those interests are held by separate parties.
Why are leaseholds changing?
In July 2020, the Law Commission published three reports – two on the leasehold system and one looking at boosting commonhold property ownership.
The research highlighted the unnecessarily high cost of extending leases, poor value property management and a complex legal process for leaseholders wanting to extend their leases or buy their freehold.
The report also noted house builders were increasingly selling their new homes as leaseholds and charging homeowners expensive ground rents that controversially doubled every 10 years.
The government asked the commission in 2017 to come up with recommendations to make leaseholds cheaper and fairer for homeowners, which led to the new changes.
Who profits from leasehold reforms?
Leasehold property owners are the big winners – including landlords with buy to let flats.
They stand to have better security of tenure and could save tens of thousands in ground rents, service charges and other property related costs.
The losers are freeholders who lose a valuable income stream, with some property investors having to revisit their business models.
Several of the big housing developers have already pledged to drop leasehold terms on new build flats, including Taylor Wimpey, Bellway, Countryside and Barratt. Taylor Wimpey and Bellway extended the promise to cover houses as well as flats.
The builders bowed to pressure from trading standards watchdogs who accused them of breaking consumer protection laws by misleading homebuyers about their prospects of buying out their leaseholds.
Many mortgage lenders have also rejected loans on leasehold properties with onerous terms in their leases as they fear the homes may become unsellable, while the government Help to Buy scheme for first time buyers will only consider homes with peppercorn or nominal ground rents.
What is a commonhold?
Commonhold is a relatively new form of property ownership that the government is encouraging to take the place of leasehold.
Commonhold allows a group of property owners to take over the freehold of flats in a block or homes on an estate to manage for themselves as unit holders in a commonhold association.
The commonhold is divided into units – which are the individual homes – and common areas which are used by each unit owner. Each unit holder owns the freehold of their home, so no restrictions limit what they can do with the property.
Unlike a leasehold, a commonhold has no time limit on ownership.
Unit owners belong to the commonhold association for the block or estate. The association makes decisions on maintaining common areas and any costs involved.