Leasehold and commonhold reform

This briefing paper considers trends in leasehold ownership and ongoing problems associated with the sector. The 2017 Government committed to legislate in this area "as soon as Parliamentary time allows". The Conservative Manifesto 2019 contained a pledge to “continue with our reforms to leasehold.” The paper was updated to include new statistics released in September 2019.

Trends in leasehold tenure

The Ministry for Housing, Communities and Local Government (MHCLG) estimates that there are around 4.3 million leasehold homes in England, of which 69% are flats and 31% are houses. Overall around 54% of flats are estimated to be leasehold, compared with 7% of houses.

In 2018, around 24% of residential property transactions in England and Wales were leasehold. Because almost all flats sell as leasehold, leasehold transactions are more common in London, where 57% of transactions were leasehold in 2018. The practice is also more common for new-build properties: 35% of new-build transactions were leasehold.

Leasehold houses are rarer: around 6% of houses were sold on a leasehold basis in 2018. However, leasehold houses are more common in the North West, where 27% of house sales were leasehold in 2018.

There is some evidence that developers were opting 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 fallen substantially: from 16% in March 2017 to 1% in June 2019. The 2017 Government’s stated intention to legislate against this practice may have had an impact on this (see below).
  

Leaseholders are owner-occupiers in a landlord and tenant relationship

Owners of long leasehold properties do not 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, which is supplemented by statutory provisions. The freeholder (landlord) retains ownership of the land on which the property is built. Essentially, long leaseholders buy the right to live in the property for a given period of time.

Problems associated with leasehold ownership

Leaseholders report a whole 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 costs associated with administration charges and applications to extend lease agreements or enfranchise; and a lack of knowledge over their rights and obligations. The recent trend of developers selling houses on a leasehold basis has been accompanied by lease agreements that set ground rents at a relatively high level and which are subject to 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 has been aimed at strenghtening the rights of long leaseholders, 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.

Government proposals 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 paper included, amongst other things, proposals to tackle the sale of new-build houses on a leasehold basis and to control ground rent levels in new lease agreements. Consultation closed on 19 September 2017 – the process attracted 6,000 responses. A summary of the responses received and the Government response was published in December 2017. In the Ministerial Foreword, the then Secretary of State, Sajid Javid, committed the Government to act on leasehold abuses:

Looking at the responses to this consultation it’s clear to me that real action is needed to end such abuses and create a system that works in the best interests of consumers. And that’s exactly what this government will deliver.

Specifically, the 2017 Government has 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.”

The aim was to seek to bring forward solutions by summer recess 2018 and then to legislate “as soon as Parliamentary time allows.” The 2017 Government published a further technical consultation paper, Implementing reforms to the leasehold system in England, on 15 October 2018. This consultation ran to 26 November 2018. The outcome was published on 27 June 2019: Implementing reforms to the leasehold system in England: summary of consultation responses and government response. This paper states that the Government would bring forward legislation as soon as Parliamentary time allows to enact these measures, specifically:

• We will legislate to ensure that unless there are exceptional circumstances, all new houses will be sold on a freehold basis.
• Ground rents on future leases will be reduced to a peppercorn of £0, meaning leaseholders will no longer be charged a financial sum for which they receive no material benefit.

The 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 contained a pledge to “continue with our reforms to leasehold”.

The Law Commission published proposed measures to help existing leasehold homeowners buy the freehold of their homes on 19 July 2018; a detailed consultation paper followed on 20 September 2018 (see below).

The 2017 Government commissioned research from the Cambridge Centre for Housing & Planning Research to “examine the issues of the levels of leasehold and freehold charges being charged, and the variation within these, in order to inform the development of the Ministry’s leasehold reform policy and future programme.” The project began its work in December 2018.

On 28 March 2019, the Ministry of Housing, Communities and Local Government published an industry pledge which set out an intention to help existing leaseholders with onerous ground rent terms in their lease agreements. At 27 June 2019 it had been signed by 62 developers/agents.

Housing, Communities and Local Government Select Committee inquiry

The HCLG Select Committee launched an inquiry into leasehold reform on 24 July 2018 with a focus on the position of existing leaseholders – submissions were invited up to 7 September 2018. The Committee’s report was published on 19 March 2019. The written evidence submitted to the inquiry together with the oral evidence sessions can be accessed on the Committee’s website. The Government response was published on 3 July 2019.

Mis-selling of leasehold properties

On 14 May 2019, the CEO of the Competition and Markets Authority (CMA) wrote to the Chair of the HCLG Select Committee, Clive Betts, confirming that an investigation would be carried out “to see the extent of any misselling and onerous leasehold terms, including whether they might constitute ‘unfair terms’ as legally defined.” See section 3.3 of the paper for more information.

The Law Commission’s 13th Programme of Law Reform

As noted above, the Government said it would work with the Law Commission to support existing leaseholders. The Law Commission’s work in this area is ongoing – the full Terms of Reference have been published. In line with the Government’s request, the Commission is prioritising measures for the owners of leasehold houses and on 19 July 2018, the Commission published proposed measures to help existing leasehold homeowners buy the freehold of their houses. Subsequently, consultation on enfranchisement and lease extensions was launched on 20 September; submissions were invited up to 7 January 2019. There is a full report and a summary document, as well as separate short summaries of what the proposals would mean for leaseholders of houses, leaseholders of flats and landlords. The Commission said that the proposals amount to “a new, single regime for leasehold enfranchisement designed to benefit leaseholders of houses and flats.” During an adjournment debate on 2 October 2019, Ester McVey, the Minister for Housing, said that the Commission would report back to the Government on options for reducing the price of enfranchisement “this autumn” and on “all other aspects of the enfranchisement regime early next year”. Her Written Statement of 31 October 2019 referred to February 2020 as the date by which the Commission would report back on other aspects.

On 4 July 2018, James Brokenshire, then Secretary of State, asked the Law Commission to look at improving the Right to Manage. The Law Commission published its consultation paper, Leasehold homeownership: exercising the right to manage, at the end of January 2019; responses were invited up to 30 April 2019.

Commonhold

The Commonhold and Leasehold Reform Act 2002 introduced a new form of commonhold tenure. This form of ownership already operates around the world; for example, the Australian Strata Title system and the condominium system in America.

One of the key aims of the Act was to overcome the disadvantages of leasehold ownership. It was assumed that, once in place, commonhold would become the standard form of tenure for new-build blocks of flats. In practice, it has failed to take-off – there are very few blocks in commonhold ownership. Given ongoing issues associated with leasehold tenure, there have been many calls to review the legislation and implement changes in order to make it a workable and attractive option in England and Wales.

An urgent review is supported by the All Party Parliamentary Group (APPG) on Leasehold and Commonhold (established in 2016). In Tackling unfair practices in the leasehold market, the Government said it would carry out a wide ranging project looking at several issues including “improving commonhold.” In Tackling unfair practices in the leasehold market: government response (December 2017), the Government said that work with the Law Commission would also “reinvigorate commonhold to provide greater choice for the consumer.”

The Law Commission issued Commonhold: A Call For Evidence on 22 February 2018 – submissions were invited up to 19 April 2018. A public consultation exercise was launched on 10 December 2018; submissions were invited up to 10 March 2019. 

The letting and managing agent market

In October 2017, the Government published Protecting consumers in the letting and managing agent market: call for evidence, responses were accepted up to 29 November 2017 and the Government response was published in April 2018. The process sought views on measures that could be taken to improve leaseholders’ rights in relation to the quality, price, and service provided by management companies appointed by freeholders.

The Government has committed to regulating managing agents in addition to letting agents “to protect leaseholders and freeholders alike”. A Working Group led by Lord Best has been established to develop the regulatory regime. Membership of the Group and the terms of reference were published on 12 October 2018. The Group’s report was published in July 2019. The recommendations on the new regulatory regime are covered in section 3.13.

The Queen’s Speech on 19 December 2019 contained a commitment to introduce a Renters’ Reform Bill which would “Professionalise letting agents, to the benefit of tenants and landlords.”

Buying a leasehold property

The 2017 Government ran a parallel call for evidence between October and December 2017: Improving the home buying and selling process. The paper posed questions about buying a leasehold property with a view to exploring ways in which leasehold information might “be released to a more predictable timescale, more consistently and at reasonable cost.” The outcome was published in April 2018. 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.

Consultation on this issue was included in Implementing reforms to the leasehold system in England which was published on 15 October 2018 with submissions up to 26 November 2018. In Implementing reforms to the leasehold system in England: summary of consultation responses and government response (27 June 2019) the 2017 Government confirmed that freeholders and managing agents would be required to provide leasehold information within 15 days and that the maximum fee for providing this information would be set at £200 (plus VAT).

Complaint resolution

A further consultation process, Strengthening consumer redress in the housing market, was launched on 18 February 2018 and ran to 16 April. This process sought views on “better ways for consumers across the private-rented, leasehold, social-housing and owner-occupied sector to resolve their complaints.” A summary of responses together with the Government’s response was published in January 2019. The 2017 Government intended to create a Redress Reform Working Group to work with industry and consumers to develop a new Housing Complaints Resolution Service. The new service will “help renters in private and social housing, leaseholders, and buyers of new homes.” The 2017 Government intended to require freeholders of leasehold properties to be members of a redress scheme:

The Government is proposing to extend mandatory membership to a redress scheme to all freeholders of leasehold properties and will introduce primary legislation to this effect as soon as Parliamentary time allows. 

The Conservative Manifesto 2019 contained a pledge to provide “necessary mechanisms of redress for tenants”.

Housing policy is a devolved matter

The Government’s leasehold reform proposals, if implemented, will only apply in England, although existing legislation does currently apply in both Wales and England. The Law Commission’s consultation paper (September 2018) states:

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 6 March 2018, the Welsh Housing and Regeneration Minister, Rebecca Evans, announced that, regarding houses which qualify for support under Help to Buy – Wales, agreement had been reached with some of the larger developers to only sell on a leasehold basis “where absolutely necessary.” On 1 May 2018 she announced that 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 Task and Finish Group issued a report, Residential Leasehold Reform, in July 2019. The report is described as “just the end of the first key stage of the work” the Group is undertaking, see section 3.16 for more information.

Scotland operates a separate regime for interdependent units – there are very few leasehold properties in Scotland. Leasehold apartments in Northern Ireland are a relatively recent development. The Northern Ireland Law Commission considered a review of the Law Relating to Apartments in 2013. 

Labour’s new deal for leaseholders

July 2019 saw publication of Ending the Scandal: Labour’s new deal for leaseholders, which set out “Labour’s plan to end the unfairness and injustice of leasehold for good”. References to the Labour Party’s proposals are included under the relevant sections throughout the paper.