Leasehold and commonhold reform

Leasehold tenure has grown

The Department for Levelling Up, Housing and Communities (DLUHC) estimates there are around 4.5 million leasehold homes in England, of which 69% are flats and 31% are houses. The majority of flats in the private sector are leasehold (an estimated 94% of owner-occupied flats and 75% of privately rented flats). Around 7% of houses in England are leasehold.

Land Registry data tells us more about leasehold sales in England and Wales. 23% of residential property transactions in 2019 were leasehold – around 216,000 transactions in total. Almost all flats are sold on a leasehold basis compared to 6% of houses.

The proportion of new-build houses sold as leasehold rose from 7% in 1995 to a peak of 15% in 2016. The proportion has subsequently fallen, reaching 1% in March 2020.

Leaseholders are owner-occupiers who are in a landlord and tenant relationship

Owners of long leasehold properties don’t necessarily appreciate that although they are owner-occupiers, they are in a landlord and tenant relationship with the freeholder. The rights and obligations of the respective parties are governed by the terms of the lease agreement, supplemented by statutory provisions. Essentially, long leaseholders buy the right to live in the property for a given period.

Problems associated with leasehold ownership

Leaseholders report a whole range of problems, including high service charges and a lack of transparency over charges; freeholders who block attempts to exercise the Right to Manage; excessive administration charges and charges for applications to extend lease agreements or enfranchise; and a lack of knowledge over their rights and obligations.

The trend of developers selling houses on a leasehold basis was accompanied by lease agreements setting ground rents at a relatively high level with provision for regular reviews, resulting in the accrual of significant ground rent liabilities for long leaseholders.

Despite a good deal of legislative actively in this area over the last 50 years, much of which was aimed at strengthening long leaseholders’ rights, they remain reluctant to seek dispute resolution through the tribunal system. An unfair balance of power, and potential to become liable for the freeholder’s costs, are cited as barriers.

A Government commitment to tackle leasehold abuses

The Housing White Paper, Fixing our broken housing market (February 2017) included a commitment to “improve consumer choice and fairness in leasehold”. The consultation paper, Tackling unfair practices in the leasehold market, marked the first step in fulfilling this commitment. The consultation process attracted 6,000 responses.

A summary of responses received and the Government response was published in December 2017. In the Ministerial Foreword, then-Secretary of State, Sajid Javid, committed the Government to act on leasehold abuses. Specifically, the 2017 Government said it would:

• legislate to prohibit the creation of new residential long leases on houses, whether newly built or on existing freehold houses,other than in exceptional circumstances;
• restrict ground rents in newly established leases of houses and flats to a peppercorn value;
• Address loopholes to improve transparency and fairness for leaseholders and freeholders; and
• Work with the Law Commission to support existing leaseholders. This will include making buying a freehold or extending a lease “easier, faster, fairer and cheaper.”

Then-Minister for Housing, Ester McVey, confirmed the Johnson Government’s intention to take forward these measures in a written statement on 31 October 2019.

The Law Commission’s 13^th Programme of Law Reform

Following various calls for evidence and consultation exercises the Law Commission published three final reports on leasehold reform in 2020:

• Leasehold home ownership: buying your freehold or extending your lease: Report on options to reduce the price payable (PDF, January 2020). There is also a summary report (PDF).
• Leasehold home ownership: buying your freehold or extending your lease (July 2020). There is also a summary report (PDF).
• Leasehold home ownership: exercising the right to manage (July 2020) There is also a summary report (PDF).

A further report summarised the Commission’s residential leasehold and commonhold reports and set out how they fit with other reforms the Government has announced: The future of home ownership (PDF).

The Commission was also tasked with considering how to “reinvigorate commonhold to provide greater choice for the consumer.” The Commonhold and Leasehold Reform Act 2002 introduced commonhold tenure but it has failed to take-off in England and Wales. This form of ownership already operates around the world, for example, the Australian Strata Title system and the condominium system in America.

The Law Commission published Reinvigorating commonhold: the alternative to leasehold ownership (PDF, July 2020) together with a summary report (PDF)and an open letter to lenders on taking commonhold as security (PDF).

A two-part legislative process

On 7 January 2021 the Government announced legislation would be introduced to set future ground rents to zero. The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022 and applies to new lease agreements created on or after that date.

On 11 January 2021 the Secretary of State provided additional information on planned reforms in a written ministerial statement. In summary, future legislation will:

• Reform the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold.
• Abolish marriage value.
• Cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. An online calculator will simplify and standardise the process of enfranchisement.
• Keep existing discounts for improvements made by leaseholders and security of tenure.
• Retain the separate valuation methodology for low-value properties known as “section 9(1)”.
• Give leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”.
• Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue, “subject to existing safeguards and compensation”.
• Enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.

There is a commitment to respond to the Law Commission’s remaining recommendations “in due course.”

On 23 June 2022, the Minister, Eddie Hughes, responded to a PQ asking about a deadline for introducing the next stage of leasehold reform. He said:

In the next parliamentary session we will legislate to reform the leasehold system, including by supercharging leaseholders’ ability to buy their freeholds, helping millions of households genuinely to own their own home.

Other relevant work

Mis-selling of leasehold properties – the Competition and Markets Authority is carrying out an investigation of mis-selling and onerous leasehold terms.

The letting and managing agent market – the 2017 Government committed to regulating managing agents and to the introduction of an enforceable Code of Practice setting minimum standards. A Working Group led by Lord Best was established to develop the regulatory regime. The Group’s report (PDF) was published in July 2019.

Buying a leasehold property – the 2017 Government said it would set timescales for agents and freeholders to respond to leasehold queries and introduce maximum fees. There was an intention to introduce standard mandatory forms for leasehold information.

Complaint resolution – the 2017 Government said it would create a Redress Reform Working Group to work with industry and consumers to develop a new Housing Complaints Resolution Service. The new service would “help renters in private and social housing, leaseholders, and buyers of new homes.” The Government’s intention was to require freeholders of leasehold properties to be members of a redress scheme:

Leasehold reform in Wales

Existing leasehold legislation currently applies in both Wales and England. The Law Commission’s consultation paper (PDF, September 2018) said:

The extent to which leasehold enfranchisement is devolved to the Welsh Assembly is unclear. Aspects of enfranchisement have, in the past, been treated as a devolved issue. “Housing” was expressly devolved to Wales in the Government of Wales Act.

[…]

Our project, therefore, is intended to cover both England and Wales, and to result, where reasonably possible, in a uniform set of recommendations that are suitable for both England and Wales.

On 1 May 2018, then-Welsh Housing and Regeneration Minister, Rebecca Evans announced the Welsh Government had formally joined the Law Commission’s leasehold reform project. A multi-disciplinary task and finish group on leasehold reform was also established. The group issued a report, Residential Leasehold Reform, in July 2019.

On 14 October 2020 Julie James AM, Minister for Housing and Local Government, told the Senedd:

…we are working very hard with the leasehold reform provisions that the Law Commission has looked at. They recently reported, and we’re looking to see what can be done in conjunction with some UK legislation, if at all possible, just due to the lack of time we’ve now got in Senedd provisions to be able to do this.

On 17 March 2021, Julie James published a written statement on the Welsh Government’s research into the sale and use of leasehold in Wales, and the experience of those who live in leasehold properties. The statement referred to the Welsh Government’s full support for the Law Commission’s recommendations but went on:

…it acknowledges that these reforms will require significant primary legislation. This will need full support from the future Senedd following the elections to be held in May 2021.

The Leasehold Reform (Ground Rent) Act 2022 has effect in Wales.