Leasehold reform

Leasehold has become a dirty word in recent years, with leases containing exorbitant – and often increasing – ground rents taking the headlines. The Housing Secretary, Robert Jenrick, has announced a series of reforms that would make leasehold ownership fairer and more secure. Zaeem Habib takes a closer look.

Many modern leases enable landlords to increase ground rents at regular intervals. This is not unreasonable given the effects of inflation over the course of long leasehold terms: however, some landlords and tenants have entered into leases that double the ground rent on every such occasion. A doubling ground rent will more often than not increase at a rate that exceeds inflation. Take for example a ground rent of £100.00 doubling once in every 10 years. In the first 10 years of a lease, the leaseholder will pay £100.00 and in the second 10 years they will pay £200.00. So far, so good. However, from the 20th year of the lease onwards the ground rent will be £400.00 and then £800.00 from the 30th year onwards and so on and so forth.

Often this has led to difficulties for leaseholders when selling their homes or seeking to re-mortgage. The solution is either a deed of variation to fix the ground rent at a set rate (or tie it into inflation), or to purchase the freehold of a property. However, leaseholders can often face significant costs from the landlord for either option.

There has been much discussion over the years regarding reform of this area of law. The recent announcement by the government will mean that 4.5 million leaseholders will obtain the right to extend their lease to a maximum of 990 years at a zero ground rent. Extending the term is a condition of reducing the ground rent to zero and tenants will have to pay the landlord for this extension.

Further the government intends to abolish prohibitive costs such as adding marriage value. This practice, which enabled landlords to ask leaseholders to pay up to 50% of the expected uplift in property value if their lease has less than 80 years left to run, will be replaced with a set calculation of costs determined by the government. Leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying “development value”.

This legislation, when introduced, is intended to extend to retirement homes. Often retirement homeowners fail to understand the impact of “event fees” which become applicable on the sale, subletting or change of occupancy. Thus the restriction or elimination of event fees is a welcome change for these leaseholders.

However, there are some pitfalls to the elimination of ground rents. Recently major property developers have begun offering flats on 999 year leases at a peppercorn rent. This is to enable them to comply with changes to the government’s Help to Buy scheme. As with all businesses, freeholders have an interest in profit and without ground rent there is no profit to be made on leasehold flats. The elimination of ground rent has meant that there is no long-term interest for freeholders and thus many of these developers have transferred the freehold to residents’ management companies (RMC) of which leaseholders become members. These RMCs would then become responsible for the repair, maintenance and insurance obligations of the properties.

The average leaseholder is unlikely to have experience in the maintenance of a building and thus there is a risk of the safety, security and integrity of a building being at risk. An example of this can be seen in Scotland where leasehold interests were abolished in 2012. Since that abolishment, there has been an absence of professional freeholders, resulting in buildings falling into disrepair and residents struggling to fund and complete their repair obligations.

Therefore, whilst for some, the Government’s reform is welcome, it’s not the complete answer to what some perceive as being the “leasehold trap”. One alternative suggested by many commentators is to cap rents at a reasonable rent and tie them to inflation. This would enable leaseholders to avoid the pitfalls of unreasonable fees and ground rents, simultaneously encouraging continued ownership of freeholds by professional freeholders.

In the meantime, we await more detail, including a timetable for when these additional proposals would be implemented, and how valuations would be calculated following the removal of the marriage value concept. It has taken many years to get to this position so it may be several more before we see this coming into effect.