There has been plenty of negative press surrounding leaseholds over the past 12 months. It has mainly concerned the incremental increase in ground rent on new-build leasehold properties. For example, in January 2018, Nathan Stewart contacted the Guardian after the sale of his house fell through. The buyers had agreed to pay £175,000 for his property, built in 2011, but the deal collapsed when their lenders refused to grant a mortgage against the property. The lenders objected to a clause whereby the ground rent doubled every ten years for 50 years, at which point the fee became capped at £4,800 a year. At the beginning of 2018, the ground rent was a mere £300 a year (a fee for which no service was provided).
Mr Stewart is far from alone in feeling he is trapped in his property. Most lenders now flatly refuse mortgages on properties with substantially increasing ground rent, making them unsalable. Developer Taylor Wimpey has set up a “Ground Rent Review Assistance Scheme” to assist homeowners, but in most cases, this only benefits those who bought directly from the company.
Both the Government and the Law Commission have pledged to address the leasehold system in England and Wales. The Government has stated that under proposed reforms, ground rents will be capped at £10. In addition, there will be a ban on sales of new houses as leasehold rather than freehold, apart from in justified cases such as shared ownership and community-led housing schemes.
Reforms for leasehold enfranchisement
Before we look at the reforms proposed for leasehold enfranchisement and how they may benefit you, let’s take a look at what a leasehold is and what enfranchisement means.
In England and Wales, a property can be owned either freehold or leasehold. If you own the freehold of the property, you own the land and house outright. Unless you choose to sell, you will own the property forever. If you buy a leasehold property, you effectively have a long-term lease from the freeholder (also known as a landlord) for a set number of years. You may have to gain permission to make alterations to your home, and you are likely to have to pay ground-rent, and in the case of a flat, a service charge to cover certain costs of the common parts of the building, i.e. stairwells.
Leasehold enfranchisement refers to the process of either extending a lease or purchasing the freehold and the Leasehold Reform, Housing and Urban Development Act 1993, provides the statutory right to embark on the process if certain requirements are met.
According to the Law Commission, there are several reasons the current leasehold enfranchisement scheme is failing homeowners:
- high ground rents, especially those that double at periodic intervals (generally ten years) during the term of a lease
- no justification for selling new homes on a leasehold basis other than the long-term extraction of profit from the homeowner
- charging of unreasonable permission fees to leaseholders if they wish to carry out alterations
- the inherent unfairness of the current system, with leaseholders seeking enfranchisement saying they feel they have to pay twice for a home they have already brought
- a lack of understanding by many purchasers about what a leasehold is and the long-term implications of buying a leasehold property
The Law Commission was at pains to point out that while there had been cases of abusive practices, most landlords acted in a fair and reasonable manner. However, research has made it clear the current leasehold system is complex, expensive for all parties, and is open to exploitation.
Reforms proposed by the Law Commission include:
- options for redesigning the valuation formula on leaseholds, striking a balance between reducing the price while ensuring landlords are fairly compensated
- simplifying the process of buying a freehold
- removing the two-year qualifying period before an enfranchisement right can be exercised
Law Commissioner Professor Nick Hopkins said of the proposed reforms:
“Enfranchisement offers a route out of leasehold, but the law is failing homeowners: it’s complex and expensive and leads to unnecessary conflict, costs and delay.
“We’ve heard of untold stress caused to homeowners who have had to put their lives on hold because of issues with their leases.
“Clearly, that’s not right, and our solutions for leasehold houses will provide a better deal for leaseholders and make sure that the law works in the best interests of house owners.”
Consultation on the proposed reforms is now open and closes on 7 January 2019. Comments can be made using an online form. Once the results of the consultation have been announced, we will update you. In the meantime, should you require legal advice regarding a lease extension or buying your freehold, please contact our property law department.
Please note, this article does not constitute legal advice.
Hart Reade Solicitors are a full-service law firm with offices in offices in Eastbourne, Hailsham, Polegate and Meads. We hold a both a Lexcel and Conveyancing Quality Accreditation from the Law Society of England and Wales. To make an appointment with one of our conveyancing solicitors, please phone our office on 01323 727 321.
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Please note the above is for information purposes only and is intended to be a short summary. It should not be treated as a comprehensive guide and should not be acted on without qualified legal advice.
