The housing minister has confirmed plans to phase out leaseholds, a reform to feature in the King’s Speech on 7 November. Rachel Maclean has tweeted: “We will restore true home ownership to millions of people and end the reign of “rip-off freeholders and incompetent, profiteering, management companies.”
The revised law is expected to prevent new houses being sold as leaseholds, other than in exceptional circumstances, along with some other reforms, but new flats will likely continue to be sold as leasehold and existing leaseholds may not be affected.
The English leasehold system is a long-standing legal and property ownership arrangement that has been in place for hundreds of years. It is deeply entrenched in the property legal framework in England, and changing it significantly would require major legal and legislative reforms with many knock-on effects.
English common law is the genesis of landlord-tenant law which evolved in England during the Middle Ages. Long leasehold was and is a means of generating more revenue for land owners (freeholders) without losing ownership of their land – and this was the beginning of the modern leasehold system that we know today.
English property and common law still retain many of the archaic terms and principles coming out of a feudal society, a social order and an agrarian based economy. When land was the primary economic asset, when ownership of land was the primary source of rank and status, land titles and ownership were highly important property rights.
The long-leasehold system is primarily used in the context of residential properties, and typically for flats and apartments, where homeowners purchase the right to occupy a property for a specified period (the lease term). But they do not own the land on which the property is built. The land remains in the ownership of a freeholder and the property block is usually managed by the freeholder or a managing agent.
Leaseholders are subject to ground rent payments and various other management and alternations fees, plus lease extension fees, which have been a major source of controversy and debate. Leasehold leaves freeholders in a strong position where leaseholders can be easily exploited. They are generally powerless when it comes to the cost of repairs and maintenance and the imposition of fees and charges. It would usually be far cheaper for leaseholders to arrange their own maintenance and repairs, but that is not usually an option for them.
Efforts to reform or even replace the leasehold system have been ongoing for years, driven by concerns about onerous lease terms, exploitation, unfair practices, escalating ground rents, and eye watering lease extension fees.
There have been legislative reforms through the Leasehold Reform Act 1967, the Landlord and Tenant Act 1987, Leasehold Reform Housing and Urban Development Act 1993 and the Commonhold and Leasehold Reform Act 2002. And in recent years there have also been proposals about specific legislative changes aimed at improving the situation for leaseholders. However, completely replacing the English leasehold system is acknowledged would be an extremely complex and challenging endeavour.
To make substantial changes to the leasehold system would require major legislative change and would impact the rights and interests of numerous stakeholders, including property developers, freeholders, managing agents and the leaseholders themselves.
The government has introduced measures through the above Acts and named changes to address specific issues within the leasehold system, such as capping ground rents on new leases and making it easier for leaseholders to extend their leases or purchase the freehold. But a comprehensive replacement of the system, as Labour has suggested, and indeed committed to, will likely require a thorough review of property laws and could face a great deal of opposition and challenges.
However, reforms to the leasehold system are an ongoing topic of debate and discussion in the UK, and the specific regulations and laws related to leasehold properties will change as policymakers and legislators respond to public concerns and changing circumstances.
One major concern has been the sale of new houses as leaseholds. This has been a scandal where in some cases developers have been exploiting new home buyers by imposing exorbitant ground rents and charges to the point where the properties they bought have became unsaleable.
The Minister of State (Housing and Planning) Rachel Maclean MP therefore has confirmed plans to change the law on leaseholds, and this is expected to phase out new-build house leasehold sales, to be included in the King's Speech on 7th November 2023.
If this change becomes law, all new houses built and sold in England and Wales will have to be sold as freeholds following the Government’s stated intention to phase out leaseholds which have led to homeowners being hit with huge bills for maintenance and escalating ground rent payments.
Plans to bring about this change have been much-delayed and it appears that there has been a lot of watering-down of what was originally stated as an intention to carry out a root-and-branch overhaul of the leasehold system. Mr Gove has been quoted as calling out the leasehold system as outdated and he labelled it as “feudal”, but for the reasons stated above, the system is probably just too deeply embedded and has too many stakeholders affected, to be tackled, to be abolished at this time.
Ministers have said they want to make it simpler and quicker for leaseholders to take control of the management of their buildings under existing “right to manage” rules. The Government has also stated its intention to reformed the existing commonhold system to make it more attractive as an alternative to the leasehold ownership for flats.
Ministers are said to be proposing to cap all ground rents on new lease agreements to a peppercorn amount, as well as a change standard lease extensions from 90 years to 999 years (virtual freehold). The requirement to have lived in a property for two years before negotiating a lease extension, and also the concept of “marriage value”, could be abolished.
Most of these proposed changes, if enacted, will most likely only apply to new leaseholds, and there are some concerns for those who have already purchased leasehold houses. They could be left stuck with assets that are encumbered with ongoing high charges, making them difficult if not impossible to sell.
Longer term, leasehold reform is included in the Law Commission's 13th Programme of Law Reform with the aim of finding ways to make buying a freehold or extending a lease “easier, faster, fairer and cheaper.”
A Department for Levelling Up, Housing and Communities spokeswoman has said:
“We have already made significant improvements to leasehold – ending ground rents for most new residential leases and will make it easier and cheaper for leaseholders to extend their lease or buy their freehold.
“The Secretary of State has been clear that we will bring forward legislation to protect leaseholders as soon as is possible. This will give them more information on their service charge costs and ensure they are not subject to any unjustified legal costs.”
Labour has committed to banning all leasehold tenure if it wins the next general election, but even the changes now proposed could have serious consequences for some stakeholders, let alone complete abolition.
If these changes in the form of the current proposals come about there will be some substantial losers. Freeholders whether they be property companies or individual landlords would probably lose out as they will lose an income stream from owning ground rents, to be capped at a peppercorn amount.
The move will also have implications for many local authorities that derive substantial income from the ground rents they own, along with the taxman. HMRC will lose out on all of the tax revenue from the same income.
Lots of pension funds will need a big re-think as many of their freehold property investments derive a substantial income from the ground rents their leaseholders pay them, the ultimate losers being private pension holders.
Leasehold flats with short leases – less than 70 years left on the leases - are often cheap to buy and give first time buyers an opportunity to get on the housing ladder when otherwise they would be priced out, as is generally the case in London. These people would lose out as well.
So, major leasehold reform, complete abolition could open up an expensive “can of worms” for any government carrying out this sort of radical change. The answer to the questions therefore is, no, the leasehold system in England cannot be easily changed, apart from “tweaking” around the edges. Labour will have one big task on its hands!