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Are we getting closer to leasehold reform?

Posted on 2017-09-15

Are we getting closer to leasehold reform?

The campaign to reform the leasehold system has been a long-running one. Those involved believe a dramatic overhaul is needed to make things fairer and less ripe for exploitation and abuse.

As things stand, there is an All Party Parliamentary Group (APPG) focusing on the issue and, in July, the Government unveiled its plans for a potential ban on new-build leaseholds. In its pre-election manifesto, the Conservative Party also pledged to overhaul the system if it regained power.

But what are the main issues at play and what is being done to solve them?

Why is the reform being called?

Leasehold homes have long proved controversial, with critics pointing to the extra costs leaseholders are forced to pay – including service charges and often onerous ground rents – as damaging and unfair. When it comes to homes, there are two main types: freehold and leasehold. While a freeholder owns the home and the land it sits on outright, a leasehold property is where a homeowner owns the home for the duration of their lease agreement with the freeholder. Ownership returns to the freeholder when the lease expires unless an extension is agreed.

The main issue with leasehold property is spiralling ground rents, with some developers accused of doubling ground rents every decade. In some cases, houses have become ‘unsaleable’ because of rising ground rents.

This, and other factors, led to the formation of the APPG on Leasehold and Commonhold reform in 2016. In April 2017, this group – made up of MPs from across the political spectrum – called for leasehold houses to be banned and for an end to ‘onerous ground rents’.

In turn this led to the Government announcing its intention to ban new-build homes from being sold as leasehold, while restricting ‘ground rents to as low as zero’. It remains unclear, however, how existing leaseholders will be affected by the ban, with question marks over whether they could be recompensed for unfairly high ground rents.

The new measures, subject to an eight-week consultation (open until 19 September), would close legal loopholes to protect buyers and give homeowners more power to directly challenge what they perceive as unfair charges. 

How many homes would be affected by reform?

While the Government has only revealed plans to ban housebuilders from selling new-build homes as leaseholds and drastically reduce ground rents, there will continue to be considerable pressure and lobbying for a complete overhaul of the system. In England some 21% of private housing is counted as leasehold. Of this, nearly a third constitutes houses and the rest is made up by flats and apartments.

As a general rule, houses are sold as freehold while flats and apartments are sold as leasehold, but in recent years leasehold homes have become a far more popular phenomenon. Under the Government’s plans, flats and apartments could still be sold as leasehold, which will leave some worried that the same old problems would still exist even if leasehold houses are banned.

There are approximately four million residential leasehold properties in the UK, with only 1.2 million of these counting as leasehold homes. So even if leasehold homes are banned in the future, there are still a lot of existing homeowners that are affected and the calls for complete leasehold reform are likely to remain loud.    

Will the system be revamped?

It seems certain that, after the eight-week consultation, the ban on new-builds being sold as leasehold will come into play, alongside extra restrictions on ground rents. The Government is certainly taking a combative approach, at least in public. Communities Secretary Sajid Javid, when announcing the possible ban, said he was determined to take a hard-line approach.

“It’s clear that far too many new houses are being built and sold as leaseholds, exploiting home buyers with unfair agreements and spiralling ground rents,” he argued. “Enough is enough. These practices are unjust, unnecessary and need to stop. Our proposed changes will help make sure leasehold works in the best interests of homebuyers now and in the future.”

What kind of measures will come into play, and how stringent these will be, remains to be seen. A complete overhaul of the leasehold system also seems unlikely at this point, although there will still be pressure from interested parties to make this so.

The Government has promised to change the rules of its flagship Help to Buy equity loans to ensure that the scheme is only used to support new-build homes on acceptable terms, as well as reducing the risk to leaseholders of having homes repossessed if they can’t cope with ever-growing ground rents. 

Is the housing industry on board?

It’s certainly a hot topic of debate, with many key figures eager to address the issue of unfair leasehold practices. Major high street lender Nationwide, for example, imposed a minimum lease term of 250 years for new-build houses and 125 years for new-build flats in May, in addition to a ban on unfair ground rent increases.

And, in June, a cross-sector group of conveyancing and legal bodies outlined proposals to reform and regulate the leasehold sector. The Government will now be expected to follow suit. 

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