14 January, 2021
In 2017, the government announced plans to tackle leasehold exploitation following an investigation by The Guardian in 2016, which found that some developers were using contracts on leasehold houses to double ground rents every 10 years, thus making it difficult for leaseholders to sell their homes on. However, following the publication of reports into leasehold enfranchisement last year by the Law Commission, in England, leaseholders are to be given the right to extend their leases by a maximum term of 990 years at zero ground rent, in a move the government claims will form part of the biggest reform in English property law for 40 years and which is likely to save households thousands, to tens of thousands of pounds.
Historically, leasehold was used for flats, but in recent years it has also applied to new build houses. This meant that leaseholders do not own their home outright and are required to usually pay an annual ground rent to the freeholder. The freeholder is then able to increase the ground rent at their discretion and is not required to provide any additional or improved benefits to the leaseholder. Under the current legislation, flat leaseholders can extend their lease at a 'peppercorn' ground rent for up to 90 years at a time, while leasehold house owners can extend only once for 50 years. Leaseholders can also face higher charges when extending their lease.
Under the proposed changes, both house and flat leaseholders will be able to extend their lease to a new standard 990 years with a ground rent at zero. The changes will also mean that a cap will be introduced on ground rent payable when a leaseholder chooses to extend their lease or payment due to become the freeholder.
The leasehold reform will abolish prohibitive costs like 'marriage value' and set the calculation rate to ensure a fairer and more transparent system. An online calculator will also be made available so that leaseholders can find out how much it will cost them to buy their freehold or extend their lease - making the system more open and transparent than it is currently. Leaseholders will also benefit by being able to voluntarily agree to a restriction on future development of their property to avoid paying 'development value'.
The new measures will also extend to protect the elderly by reversing a previous decision to exempt retirement leasehold properties from a promise to reduce ground rents on leasehold homes to zero. This implies that purchasers of retirement leasehold property will have the same right as other owners.
The government has also confirmed that it is working on establishing a Commonhold Council involving government, leasehold groups and industry representatives to prepare the market for widespread take-up of commonhold.
The proposals will come into force under a seminal two-part reforming legislation during this Parliament. The first part which will set the future ground rents to zero is to be passed in the upcoming Parliament session. It is also envisaged that a response to the remaining Law Commission recommendations including commonhold will be brought forward in due course.
Whilst this reform makes leasehold more affordable there will be implications for freehold owners in terms of stock planning and projections and viability. Once we have the detail on the calculation element we will be able to provide a further update. However in the meantime should you have any queries please do get in touch and we would be happy to help with any preliminary stock reviews / consideration of extension rights for those properties on your Asset Register to assist with risk management.
For more information contact Andrea James in our Housing & Regeneration department at firstname.lastname@example.org. Alternatively send any question through to Forbes Solicitors via our online Contact Form.