Leasehold and commonhold reform

Leasehold tenure has grown

There are around 4.6 million leasehold homes in England, according to estimates from the Ministry for Housing, Communities and Local Government (MHCLG). Long leaseholders buy the right to live in their homes for the term of the lease.

Around 68% of these are flats, while 32% are houses. Most flats in the private sector are leasehold (an estimated 93% of owner-occupied flats and 73% of private-rented flats). Leasehold houses are uncommon across England, at around 8% of the stock. However, 28% of houses in the North West region are leasehold.

There’s evidence indicating that developers had started to sell new-build houses on long lease agreements as this can represent a lucrative future income stream. 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 and was 1% in February 2021. Leasehold sales of new-build houses have traditionally been more common in the North West of England but have also declined. Around 75% of new-build houses sold in the North West in January 2017 were leasehold, compared with 8% in February 2021.

The Government’s commitment to legislate against the practice of selling new-build houses on a long lease may account for the change in trend. It’s worth noting that leasehold sales of houses other than new-builds (resale houses) remained constant in this period. Between 2016 and 2020, around 7% of all resale houses were leasehold in England, rising to around 29% in the North West. 

Owner-occupiers with a landlord and tenant relationship

Owners of long leasehold properties do not always appreciate that, although they are owner-occupiers, they are in a landlord and tenant relationship with the freeholder. The rights and obligations of the parties are governed by the terms of the lease agreement, which is 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 range of problems, including: high service charges and a lack of transparency over what they are being charged for; freeholders who block attempts by leaseholders 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, which peaked in 2016, was accompanied by lease agreements that set ground rents at a relatively high level together with provision for regular reviews. This has resulted in the accrual of significant ground rent liabilities for long leaseholders.

Despite a good deal of legislative activity in this area over the last 50 years, which has mostly been 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 legal 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 (2017) was the first step in fulfilling this commitment. The paper included proposals to address leasehold sales of new-build houses and to control ground rent levels in new lease agreements.

A summary of the responses received and the Government response was published in December 2017. In the Ministerial Foreword, then-Secretary of State for Housing, Communities and Local Government, Sajid Javid, committed the Government to act on leasehold abuses.

Specifically, the 2017 Government under Theresa May 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 new 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.”

The 2017 Government published a further technical consultation paper, Implementing reforms to the leasehold system in England, on 15 October 2018. The outcome was published on 27 June 2019: Implementing reforms to the leasehold system in England: summary of consultation responses and government response.

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 Conservative manifesto 2019 pledged to “continue with our reforms to leasehold”.

The Law Commission’s 13th Programme of Law Reform

Following 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 (January 2020). There is also a summary report.
• Leasehold home ownership: buying your freehold or extending your lease (July 2020). There is also a summary report.
• Leasehold home ownership: exercising the right to manage (July 2020) There is also a summary report.

A further report, The future of home ownership, summarises the Commission’s residential leasehold and commonhold reports and explains how they fit with other reforms the Government has announced.

The Commission was also tasked with considering how to “reinvigorate commonhold to provide greater choice for the consumer.” Commonhold tenure offers owners of units in multi-occupied blocks an interest which is closely analogous to a freehold interest.

The Commonhold and Leasehold Reform Act 2002 introduced commonhold tenure. It was assumed that, once in place, commonhold would become the standard form of tenure for new-build blocks of flats. In practice, there are very few blocks in commonhold ownership.

On commonhold, the Law Commission published:

• Reinvigorating commonhold: the alternative to leasehold ownership (July 2020) together with a summary report and an open letter to lenders on taking commonhold as security.

Next steps: reform in two stages

On 7 January 2021, the Government announced that legislation would be introduced to set future ground rents to zero. The Leasehold Reform (Ground Rent) Bill [HL] 2021-22 is now progressing through Parliament. This is the first part of “seminal two-part reforming legislation in this Parliament.” The Government will respond to the remaining Law Commission recommendations, including commonhold, “in due course.”

A Written Ministerial Statement on 11 January 2021 set out some of the changes the Government has committed to introduce, such as the abolition of marriage value and lifting restrictions on lease extensions.

The Statement also announced the establishment of a Commonhold Council to “prepare homeowners and the market for the widespread take-up of commonhold.”

During the Leasehold Reform (Ground Rent) Bill’s first Committee Stage in the House of Lords, Lord Greenhalgh said the aim is to bring forward a bill on wider leasehold reform “in the third Session” of this Parliament.