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Leasehold reform has started – about time!

Just when we thought that the leasehold scandal of recent years had been overtaken by the cladding debacle, it comes roaring back into the headlines following what’s been described as a “monumental change” in the law.

The leasehold reform (Ground Rent) bill, designed to restrict ground rents for future leaseholders, (and bans rent administration charges in most future residential leases with a term longer than 21 years) received Royal Assent in February 2022 after the Act was introduced in the House of Lords in May 2021. It represents the first stage of the government’s stated aim of making leaseholder ownership fairer and more affordable.

Not surprisingly there has been acres of coverage on this story and the new legislation’s implications.

On the day, Eddie Hughes, Parliamentary Under-Secretary of State for Rough Sleeping and Housing said: “I am delighted that we have put an end to ground rent charges for future homebuyers…this truly monumental change will set ground rent to zero on new leases from this summer.”

What does it mean?

It is change, of that there is no doubt, and it’s significant, but “monumental” at this stage might be pushing it. For context according to the latest statistics from the Department of Levelling Up, Housing and Communities, there are around 4.6 million leasehold homes in England and Wales, which is around 19 per cent of the housing stock, mostly apartments and newly built homes. The highest proportion of leasehold properties are in London at 34 per cent and here in the North West at 31 per cent.

Leasehold homeowners pay ground rents to freeholders for the land their home is on. Prior to this Act, freeholders of land could charge whatever they wanted as a ground rent and, in many cases, this rose substantially over time – as much as 100 per cent every time (known as doubling ground rents) it came up for review.

The new law therefore effectively abolishes ground rents on new leaseholds, but not yet for existing leaseholders. There are already calls for the need to address this, with many current leaseholders trying to sell their homes hitting the skids because mortgage firms and banks not willing to approve lending on such properties.

An amendment had been proposed at this bill’s third reading which would have eliminated ground rents for existing properties, but it was defeated and will now be the focus on the next part of the Act later in the year. Hopefully!

What was the scandal?

I say hopefully because change has been laboriously slow. First let’s go back a few hundred years when the system of lease holding started. The term ‘Freeholder’ was used in the Doomsday book when all land in England belonged to the King who granted barons permission to build on, live on or rent it out to peasant farmers so they could maximise their earnings from it. It’s one of the reasons the current situation is described as modern feudalism.

By the 20th century, with legislation restricting rent rises landowners and landlords with diminishing incomes started to sell longer leases of their houses and flats to bring in more money, which ushered in the modern leasehold system. Over time and increasingly in the last few years they saw the benefit of charging more and started to increase the cost of ground rents every time it came up for review. Previously any rise would be in line with inflation.

It became a scandal though when a few years ago residential developers realised that they could make extra cash too. For example, if they built 100 apartments in one building with an annual ground rent of £250 that meant an additional income of £25k and that is very attractive to a prospective buyer of the building’s freehold, especially given the ability to double the rate 10 years down the line. It’s a cast-iron guaranteed five per cent yield. In almost all cases the property owner was the unsuspecting victim. They were left with a home so burdened with extra cost that they were mortgageable and unsaleable.

So developers’ greed – and many were doing it – is the root of the leasehold scandal and it reached a point after 10 years or more where the government said that this was unacceptable – it was ripping people off – and said: “no more”.

What next?

The government’s intervention has helped to reduce the tide of the bad headlines that put people off buying an apartment with a leasehold for fear of not being able to sell it on because of the lease terms. At the same time the big boys in the industry have been sorting out the mess that they made. However, there are still some issues in the market. While the passing of the Act is welcome news for new leaseholders, it will not have retrospective effect and leaves a large number of leaseholders facing unmanageable and extortionate ground rents each year.

The government has been clear though that the abolition of future ground rents is a starting point – and the next step will be to address existing leases where leaseholders find themselves trapped by escalating ground rents.

It has been consulting on recommendations made by the Law Commission in July 2020 which are seen as key to making it easier and cheaper for leaseholders to extend their leases, buy their freeholds or exercise the right to manage. Another aspect of the proposed reform is to make ‘commonhold’ (apartments owned on a freehold basis so that owners’ interests with decision making powers last forever) more attractive so that eventually it becomes the preferred alternative to leasehold home ownership. as it is in the majority of other countries.

So, it is clear that change is coming, but how and when it will happen is still unclear. We at City Residential, alongside much of the industry, welcome the attempts to stamp out bad practice, and in the meantime we are here to answer all your questions on buying a leasehold apartment.

In the next blog we will give you tips on buying an apartment, from the leasehold and ground rent reviews, to cladding issues and block management and more besides.

 

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