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On 7th January 2021, one of the biggest reforms for almost half a century in English Property Law was announced; millions of leaseholders will be given the right to extend their lease by a minimum term of 990 years at zero ground rent.
In the United Kingdom, around 4.5 million people currently own a leasehold home. The government was pressured to respond as several years ago it emerged that properties were being sold with clauses that meant ground rents would rise dramatically in later years – undoubtedly, making it near-impossible to sell on.
Typically, they are set at a low “peppercorn” rate but clauses in some new developments stated that ground rents would be doubling every 10 years, leaving owners unable to move and facing hefty bills, with some homes being unmortgageable. This is known commonly as the ‘leasehold scandal’ and has been part of the property conversation since 2017.
This announcement is the biggest step the government has taken so far in outlawing issues with leasehold houses and punitive ground rents.
Current Position
At present, leaseholders of flats are able to extend their lease at zero ‘peppercorn’ ground rent, however this is usually only for a maximum period of 90 years. Meanwhile, leaseholders of houses are only able to extend their lease once for 50 years at a ground rent.
Freeholders have the ability to increase ground rents without offering any benefit to leaseholders, even though leaseholders are burdened with the cost. A home is an investment, however, shrinking lease terms does not strengthen profitability for owners’ long term. With extortionate fees and a lengthy process to extend leases, owners have now been given the opportunity to gain a higher return.
What changes are in store?
Since 2017, the government has been investigating ways to modernise the ‘feudal’ leasehold system and is now starting to act on recommendations made last year by the Law Commission.
- Extension of Lease to 990 years and an end to ground rent
The proposals mean leaseholders will be able to extend their leases for a new standard of 990 years and are no longer obliged to pay an annual ground rent to their freeholder.
Theoretically, this would give the leaseholder the security of not needing to extend the lease again in the future and subsequently, end the practice of freeholders charging ever-increasing ground rents. Consequently, making home ownership more secure.
- Introduction of Lease Online Calculator
The government are in the process of generating an online calculator which will be introduced to make it easier for leaseholders to find out exactly how much it will cost them to extend their lease or buy the freehold for their property.
The tool will act as a barrier for freeholders over quoting unreasonable prices for extending a lease, making a standardised guide for all. It will also apply a discount for any home improvements the leaseholder has made.
- Removal of marriage-value
If a lease has less than 80 years to run, landlords can currently ask leaseholders to pay 50 per cent of the expected uplift in the property value, on the basis that the freehold and leasehold interests are worth more when held by one party than when held separately. This practice of adding “marriage value” to the costs of a lease extension or freehold purchase is also to be abolished.
- Commonhold and its Council
The government will be promoting a new ‘commonhold’ tenure of housing, meaning leaseholders will be given ownership of the building jointly. Taking away the need for third-party freeholders and management companies, will alleviate any additional costs faced by leasehold owners today.
In order to regulate and provide further information, the housing ministry will be establishing a ‘Commonhold Council’, designed specifically to prepare homeowners for the new focus of this tenure.
- Reduction of ground rent for the elderly
The reform will now also apply to retirement properties, and the elderly homeowner population will be protected by reducing ground rents to zero. The same rights will be provided as other homeowners, aiming to protect the most vulnerable from uncertain and rip-off practices.
Housing Minister Robert Jenrick expressed that the current reality of being a leaseholder was far too bureaucratic, burdensome and expensive: “We want to reinforce the security that home ownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners. He further added that “These reforms provide fairness for 4.5 million leaseholders and chart a course to a new system altogether”.
When can we expect to see change?
The government have announced that the legislation surrounding ground rents will be brought forward in Spring, during the upcoming session of Parliament.
It has been pledged that new-build houses will no longer be sold as leasehold and ground rents will be reduced to zero on new retirement properties.
It is not known when the new laws assisting current owners will come into force, but the Government first committed to reform back in September 2017; it is reasonable to assume that legislation will take several years to come through.
How Berkeley Rowe can assist
Our Conveyancing team here at Berkeley Rowe, led by partner Hussain Ahmed, specialise in leasehold matters and are happy to assist you if you or someone you know owns a leasehold interest in their property. Here at Berkeley Rowe, client needs are of the utmost importance and it is positive to witness the government proposing ground-breaking yet essential changes to reform the leasehold market.