Leasehold and commonhold reform
This paper considers trends in leasehold ownership, ongoing problems associated with the sector, and Government plans for future legislation.
The Department for Levelling Up, Housing and Communities (DLUHC) estimates there are around 4.98 million leasehold homes in England, of which 70% are flats and 30% are houses. The majority of flats in the private sector are leasehold (an estimated 94% of owner-occupied flats and 71% of privately rented flats). Around 8% of houses in England are leasehold.
Land Registry data tells us more about leasehold sales in England and Wales. 24% of residential property transactions in 2022 were leasehold – around 207,000 transactions in total. Almost all flats are sold on a leasehold basis compared to 7% of houses.
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 less than 1% in December 2022.
Leaseholders are owner-occupiers who are in a landlord and tenant relationshipOwners of long leasehold properties don’t necessarily appreciate that although they are owner-occupiers, they are in a landlord and tenant relationship with the freeholder. The rights and obligations of the respective parties are governed by the terms of the lease agreement, supplemented by statutory provisions. Essentially, long leaseholders buy the right to live in the property for a given period.
Problems associated with leasehold ownershipLeaseholders report a whole range of problems, including high service charges and a lack of transparency over charges; freeholders who block attempts to exercise the Right to Manage; excessive administration charges and charges for applications to extend lease agreements or enfranchise; and a lack of knowledge over their rights and obligations.
The trend of developers selling houses on a leasehold basis was accompanied by lease agreements setting ground rents at a relatively high level with provision for regular reviews, resulting in the accrual of significant ground rent liabilities for long leaseholders.
Despite a good deal of legislative actively in this area over the last 50 years, much of which was aimed at strengthening long leaseholders’ rights, they remain reluctant to seek dispute resolution through the tribunal system. An unfair balance of power, and potential to become liable for the freeholder’s costs, are cited as barriers.
A Government commitment to tackle leasehold abusesThe Housing White Paper, Fixing our broken housing market (February 2017) included a commitment to “improve consumer choice and fairness in leasehold”. The consultation paper, Tackling unfair practices in the leasehold market, marked the first step in fulfilling this commitment. The consultation process attracted 6,000 responses.
A summary of responses received and the Government response was published in December 2017. In the Ministerial Foreword, then-Secretary of State, Sajid Javid, committed the Government to act on leasehold abuses. Specifically, the 2017 Government said it would:
- legislate to prohibit the creation of new residential long leases on houses, whether newly built or on existing freehold houses,other than in exceptional circumstances;
- restrict ground rents in newly established leases of houses and flats to a peppercorn value;
- Address loopholes to improve transparency and fairness for leaseholders and freeholders; and
- Work with the Law Commission to support existing leaseholders. This will include making buying a freehold or extending a lease “easier, faster, fairer and cheaper.”
Then-Minister for Housing, Ester McVey, confirmed the Johnson Government’s intention to take forward these measures in a written statement on 31 October 2019.
The Law Commission’s 13th Programme of Law ReformFollowing various calls for evidence and consultation exercises the Law Commission published three final reports on leasehold reform in 2020:
- Leasehold home ownership: buying your freehold or extending your lease: Report on options to reduce the price payable (PDF, January 2020). There is also a summary report (PDF).
- Leasehold home ownership: buying your freehold or extending your lease (July 2020). There is also a summary report (PDF).
- Leasehold home ownership: exercising the right to manage (July 2020) There is also a summary report (PDF).
A further report summarised the Commission’s residential leasehold and commonhold reports and set out how they fit with other reforms the Government has announced: The future of home ownership (PDF).
The Commission was also tasked with considering how to “reinvigorate commonhold to provide greater choice for the consumer.” The Commonhold and Leasehold Reform Act 2002 introduced commonhold tenure but it has failed to take-off in England and Wales. This form of ownership already operates around the world, for example, the Australian Strata Title system and the condominium system in America.
The Law Commission published Reinvigorating commonhold: the alternative to leasehold ownership (PDF, July 2020) together with a summary report (PDF)and an open letter to lenders on taking commonhold as security (PDF).
A two-part legislative processOn 7 January 2021 the Government announced legislation would be introduced to set future ground rents to zero. The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022 and applies to new lease agreements created on or after that date.
On 11 January 2021 the Secretary of State provided additional information on planned reforms in a written ministerial statement. In summary, future legislation will:
- Reform the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold.
- Abolish marriage value.
- Cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. An online calculator will simplify and standardise the process of enfranchisement.
- Keep existing discounts for improvements made by leaseholders and security of tenure.
- Retain the separate valuation methodology for low-value properties known as “section 9(1)”.
- Give leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”.
- Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue, “subject to existing safeguards and compensation”.
- Enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.
There is a commitment to respond to the Law Commission’s remaining recommendations “in due course.”
On 23 May 2023, during a debate on leasehold reform, the Housing Minister, Rachel Maclean said:
As hon. Members will know, it is a long-standing tradition of this House that Ministers cannot comment on precise timescales and details of forthcoming legislation, but I can reassure the House today that officials in my Department are working flat out to bring forward further leasehold reform.
Other relevant workMis-selling of leasehold properties – the Competition and Markets Authority carried out an investigation of mis-selling and onerous leasehold terms.
The letting and managing agent market – the 2017 Government committed to regulating managing agents and to the introduction of an enforceable Code of Practice setting minimum standards. A Working Group led by Lord Best was established to develop the regulatory regime. The Group’s report (PDF) was published in July 2019.
Buying a leasehold property - the 2017 Government said it would set timescales for agents and freeholders to respond to leasehold queries and introduce maximum fees. There was an intention to introduce standard mandatory forms for leasehold information.
Complaint resolution - the 2017 Government said it would create a Redress Reform Working Group to work with industry and consumers to develop a new Housing Complaints Resolution Service. The new service would “help renters in private and social housing, leaseholders, and buyers of new homes.” The Government’s intention was to require freeholders of leasehold properties to be members of a redress scheme.