Flat owners (leaseholders) only own their leasehold property for a fixed period of time and during that period they pay ground rent and service charges to the freeholder (landlord).
There’s always a long-lease agreement, a detailed legal tenancy agremeent between the leaseholder and the landlord which lays down conditions of ownership, occupancy ad the number of years the lease has to run. If the lease were to end, ownership of the property reverts to the landlord, but it’s rare for this to happen – under law reforms leaseholders have an automatic right to renew / extend their lease.
Most flats are leaseholds and are usually controlled and managed day0to-day by managing agents on behalf of the landlord. Houses can also be leasehold and they usually are if they’re bought through a shared ownership scheme.
The leasehold system is virtually unique to Britain and dates back to the 11th Century. It is a legal system designed so that wealthy families could keep wealth, and the income from that wealth (namely property), in the family or firm, passing down through the generations.
Reforms brought in in the 1920s were introduced to hold-down rents and restrict the rights of landlords to evict tenants.
In time landlords realised that they could raise money by selling long leases (typically 99/125 years) of their houses and flats and still retain ownership. It is the basis of the system we know today.
In more recent times builders / developers started to realise extra value from a development by selling flats and houses as leaseholds, charging ongoing ground rents, and then selling the leases on to investors. The problem was that the system started to be abused. They got greedy: they started them off with expensive ground rent charges that were in some cases set to double every 10 years, making payments rise exponentially over time. Unsuspecting young couples were often lulled into buying properties which became unsaleable due their long-term lease liabilities.
There have been several leasehold reform Acts in more recent years. The Leasehold Reform Act 1967 (‘the 1967 Act’) gave leaseholders the right to acquire the freehold and any intermediate leases.
The Commonhold and Leasehold Reform Act 2002 introduced the concept of the commonhold, a new way of owning land similar to the Australian and American condominium, into England and Wales. Unfortunately, for one reason or another they were rarely taken up.
Other reforms included in the Act gave leaseholders of blocks of flats in England the right to take over the management of the block from their landlords, subject to complying with certain qualifying conditions. Other rules strengthened leaseholders’ rights against unreasonable charges and improved the way the Leasehold Valuation Tribunals (LVTs) worked to address disputes between leaseholders and landlords.
Given the recent abuses of the leasehold system, these 2002 changes and the more recent changes proposed in the The Leasehold Reform (Ground Rent) Bill 2021-22, which seeks to restrict ground rents on newly created long leases of houses and flats to an annual peppercorn rent, are deemed not to go far enough. Michael Gove, the new levelling-up secretary, is said to be prioritising the ending of leasehold abuses, with further legislation planned in the next Queen’s Speech.
The current Bill having progressed through the House of Lords and Commons is due to enter its final stages soon.
Under the new law thousands of homeowners will get the power to buy their freehold. The plans would effectively phase out many leaseholds in England. Rules that prevent flat owners from buying the freehold to their property if a small part (25%) of their building is given over to commercial use, such as shops, a common configuration is cities, will go.
The new law will also make it easier for leaseholders in blocks of flats to take over management of their buildings, bringing them into common ownership in an attempt to avoid the extortionate management fees and ground rents which many leaseholders have been subjected to.
Property developers will be banned from charging ground rents on new-builds. The practice of developers selling off the freeholds to private equity companies, racking up charges to homeowners and trapping them in the properties, finally cooked the goose that laid the golden egg!
Michael Gove has said he is happy to be “taking on dukes and developers” who have made fortunes out of the system. Gove has been warned by some that he should not pick a fight with developers, companies the government needs to meet it’s housebuilding targets, but he has ignored these warnings. He’s already in the builders /developers bad books over the cladding payments they are likely to have to make.
The cladding scandal
Despite even these most recent reforms, critics say the system is still inherently unfair to homeowners who lease properties, and the cladding scandal has simply served to highlight their plight.
Thousands of flat leaseholders, many of them young couples or singles just starting out in life, are faced with extortionate charges for ongoing fire-watches and building safety, life-changing amounts of debt needed to rectify unsafe cladding, and they cannot sell.
Gove is said to want to phase out the leasehold system altogether. He wants to come up with a formula for establishing the value of freeholds and to take the responsibility off leaseholders to pay the legal fees of the freeholder. These plans are now out for consultation
Chief losers from these reforms if they do arrive will be the likes of the Queen and the Duke of Westminster, large landowners, along with many others who own large tracts of freeholds prime residential properties in the capital. Pension funds, holding many peoples’ pension savings, also have many millions invested in these residential portfolios tenanted by long leaseholders.
These reforms if they match the proposals will have the potential to bring about a fundamental shift in the way property is owned and managed in Britain, and particularly in the capital where the majority of the leaseholds reside, leading to a major re-balancing of wealth.