Thought Leadership

The Future of Leasehold: The Government’s Plans to Reform Residential Property Laws

February 18, 2021 Advisory

In January 2021, the U.K. Government announced a series of sweeping reforms to the laws relating to ownership of leasehold houses and flats in England and Wales. This follows the announcement in 2019 that the Government intends eventually to ban the sale of new leasehold houses and end the imposition of ground rent in new leases.

Proponents of the changes extol an end to what’s been widely considered a draconian system of charges, whilst some critics say that the reforms do not go far enough, and that there is no clear timescale for the changes to become law.

The Housing Secretary Robert Jenrick MP said that:

“Across the country people are struggling to realise the dream of owning their own home but find the reality of being a leaseholder 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.

These reforms provide fairness for 4.5 million leaseholders and chart a course to a new system altogether.”

So what is changing? The key proposals include:

  • Leaseholders of residential properties will have the right to extend their lease to a new standard term of 990 years at zero (or a ‘peppercorn’) rent.
  • Ground rent payable on lease extensions or when buying the freehold will be capped.
  • Marriage value will be abolished.
  • A ‘Commonhold Council’ will be established in preparation for what the Government hopes will be the eventual “widespread uptake” of more American condominium style commonhold properties – also a widely used ownership model across Europe and in Australia.*
  • A final report has been published by a working group for the regulation of all property/managing agents. The Government is considering the recommendations.

It is hoped that the first of the changes – to set future ground rents to zero – will be implemented during the current Parliamentary session. No one is yet sure when the rest of the changes will materialise.

Whilst on the surface this seems to be mainly good news for leaseholders and prospective leasehold purchasers, The Leasehold Group of Companies has raised concerns with the lack of detail in the proposals and the potential of further cluttering an already complicated property market with yet another type of leasehold title. Another worry is that freeholders who face the prospect of losing income with the abolishment of ground rents and marriage value will seek to recover those losses elsewhere – such as by increasing property asking prices. There is also a noticeable lack of a plan for the abolishment of the ‘two-year rule’ (whereby a leaseholder must have owned their property for a continuous period of two years before being able to exercise the right to extend their lease) which seems to be at odds with Jenrick MP’s mantra.

But what about freeholders and developers? That is less clear at the moment, but an initial view suggests that the legal ownership structure of new developments will need to be carefully considered in light of the reforms, as well as plans for ongoing management. With no certainty as to when the changes will become law, developers will need to continue to monitor the situation closely, because it is possible that the position will be different in law at completion of a new development than what it was at the start.

It remains to be seen what the true practical benefits ‘on the ground’ will be, and existing leaseholders, prospective purchasers and developers alike will all be eagerly awaiting clarification from the Government of how quickly the changes will be implemented.

If you have any questions, please contact your regular Armstrong Teasdale lawyer or the lawyers listed on this advisory.

* The ‘Commonhold’ system was introduced under the Commonhold and Leasehold Reform Act 2002, but uptake has so far been tepid. The Law Commission has made various recommendations to “reinvigorate commonhold” and, perhaps, commonhold hold may be the “new system” of which Jenrick speaks.

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