New Leasehold Deal for Landlords on the Way
The next steps in giving more rights to landlords owning leasehold properties have been announced by lawyers appointed to review the property ownership system in England and Wales.
The measures aim to give landlords a better deal by scrapping ground rent to the freeholder. Service charges come under the spotlight in ‘right to manage’ draft proposals, and landlords may have the chance to buy back years on a lease at a much lower price than at present.
The proposals are in three reports recommending a shake-up of the leasehold system by the influential Law Commission after the government ordered a legal review. The commission is an independent body set up by Parliament to advise ministers on legal matters - it studied three main areas of the leasehold system in England and Wales.
These were leasehold enfranchisement, right to manage and commonhold. The recommendations are all leasehold properties, including flats in blocks.
The proposals are the latest in a line of sweeping changes for landlords introduced by the Conservative government in recent years.
They started with George Osborne’s cut to landlord mortgage relief and more recently included a review into changes to Capital Gains Tax and even changing how landlords file their tax returns in future years.
Why is leasehold under review?
For many landlords who have purchased buy-to-let apartments or flats, the proposed changes – if they go ahead – will come as a welcome relief.
That’s because these buy-to-let properties are more likely to be leasehold. And it is the practice of leasehold arrangements that the government is directly targeting with their review.
They want to give more rights and power to property owners. Or, a better way to put it is that they want to eliminate the glaring inadequacies of the current leasehold system.
Boost property prices
Traditionally leasehold properties are far less expensive than freehold to buy in the first place, as the buyer doesn’t ‘own’ the property but leases for a defined term. If the changes go ahead, this will make leasehold properties more attractive to buy and almost certainly increase their value. Increasing equity when they sell.
The reforms are set to affect around 4.7 million leasehold homes or apartments in England and Wales. Landlords with property in Scotland won’t be affected because there is no need for reforms. All property purchases north of the border are subject to ‘Outright or Absolute Ownership.’ This includes not just houses but also apartments and tenement buildings.
What the leasehold review recommends
The proposed reform to leasehold enfranchisement affects property owners - usually a flat but often a new build house – purchasing property as a ‘leasehold’ and not a ‘freehold,’ i.e. they will own the building but not the land on which it stands. Leasehold contracts can range from 99 years to 999 years.
Property owners with few years left can buy back between 50 and 90 years. This and buying your property freehold is what the government could consider changing in the buyer’s favour.
Buying leasehold years
landlords can ‘buy back’ years of a lease – providing they have owned the property for at least two years or remortgaged more than two years ago. But it can prove costly, especially if the property has less than 80 years of a lease left and leaseholders must pay the freeholder’s legal costs, a not-insignificant amount.
The Law Commission recommends property owners should be able to have a lease extension lasting 990 years.
Not only that, but they want the practice of ‘buying back years’ to be less costly and to abolish the two-year waiting period. They recommend that ground rents be scrapped because those with long leases should have a ‘right to buy out’ their ground rent.
Right to manage
This proposed reform refers to leaseholders managing a building – which mainly relates to apartment blocks - without owning the freehold. This means apartment owners in a block or complex can look after and run their common areas.
There is a proposal for this ‘right to manage’ to be extended to housing estates, provided at least 50% of residents agree. ‘Right to mange’ covers landscaping, painting and the general upkeep of communal areas. Leaseholders can currently manage apartment blocks themselves but must pay the freeholder’s legal costs for the right to do so.
The new proposals will scrap these costs, allowing apartment owners to find providers to manage services like cleaning, gardening and maintenance while cutting their bills.
Commonhold is another way of owning a property, and Commonhold differs from leasehold, which is favoured in many countries.
England and Wales are among the last countries in the western world to operate the leasehold system, which dates back to 1066 and the Norman invasion. Under the commonhold system, anyone buying a new build apartment will own that property outright.
This means they won’t have to pay rent or services to a freeholder. The purchaser also owns the common parts of the property. Commonhold agreements have been around in England and Wales since 2002 but with a poor take-up from developers.
Selling the freehold to a third-party investment company is far more lucrative. It is currently possible for a leasehold property owner to change to a commonhold, but the legal machinery is so demanding that it has never been used.
To do so needs permission from the freeholder, every leaseholder in a block and their mortgage lenders. Under new proposals, the Law Commission recommends that only permission from half the leaseholders is needed to form a commonhold.
There is a chance of making commonholds compulsory in all new developments.
Why are leasehold reforms needed?
The government wants to eliminate rip-off leasehold contracts after scores of complaints about massive hikes in ground rents. ‘Unfair practices’ have included new build properties bought as leaseholds by unsuspecting owners who assumed they were purchasing the freehold.
The developer then sold the freehold to an investment company. Under the proposed new reforms, the buyer would be informed they were purchasing a leasehold property and then be offered the right to buy the freehold first. The Competition and Markets Authority is currently investigating whether there is a case of leaseholders being ‘mis-sold’ their homes by developers.
Other unfair practices include freeholders regularly increasing the cost of the ground rent and additional fees such as service charges and permission charges.
The latter refers to the owner paying the freeholder for the right to add an extension to their property or even to paint it.
Permission charges can prove expensive, while it is common for ground rents to be doubled every three years or so.
This is a review – what about some action?
No date is set for reform if the government accepts the changes, and that’s because ministers are currently reviewing the Law Commission report.
A draft bill is needed before Parliament before becoming law, so landlords are likely to see the recommendations through next year.
However, the topic has been contentious for some years, and the government is seriously considering reform. Ministers are backing leasehold reform as a priority and insist an outright ban should stop new homes from being built as leaseholds.
Leasehold reform FAQ
If you are a landlord or other homeowner confused over what’s happening to leasehold properties, here are some answers to the most asked questions.
What is a leasehold?
Leaseholders own a property but not the land it stands on. Owners rent or ‘lease’ the property from the landowner for a given term – typically 999 years.
What is a commonhold?
A commonhold generally applies to a block of flats or complex of homes and is a legal arrangement for the property owners to own and manage common areas, like car parks, gardens, halls, stairways and the like.
What is ground rent?
Ground rents are the regular payments a leaseholder pays the freeholder for the right to use their land.
What is a service charge?
Service charges are the payments a freeholder collects from leaseholders to pay for repairs and maintenance, like repainting the exterior or common areas, gardening and window cleaning.
What is a permission charge?
Permission charges are fees paid to freeholders when a leaseholder wants to make changes to a home. They range from keeping a pet and adding a doorbell to building an extension and can run into hundreds or thousands of pounds.
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