The first in ground-breaking leaseholder reforms becomes legislation – ending ground rents for new, qualifying long residential leasehold properties.
In this article, we reflect on the long-requested need to transform leasehold agreements and what impact this will have on the property sector.
Nina Harrison, London specialist at Haringtons comments, “the first stage in the impending leasehold reform is most welcome – the new Leasehold Reform (Ground Rent Bill) bans freeholders from charging admin fees for collecting a peppercorn rent (with fines of up to £30,000 if they do so). We await with interest to see how the second stage develops in the coming years, and the extent to which it addresses negative aspects of the current leasehold system, while taking account of the benefits it can provide.
“Of course, not every freeholder is a millionaire: many thousands of regular people own freeholds all over the country; some have good relationships with the leaseholders, some do not. Certainly, reform which remedies bad practice is most welcome: a poorly maintained building hurts leaseholders in the pocket as much as in their day-to-day life, easily putting buyers off, however wonderful their flat is.
“While freeholders’ actions have succeeded in maintaining the look and feel of entire neighbourhoods, like the Cadogan Estate, masterminds behind Duke of York Square, or Howard de Waldon who’ve put Marylebone on the map. Nevertheless, the current leasehold system proves very off-putting to overseas buyers and investors. All too often, they do not understand why, when they’ve bought a property, the don’t own it forever, nor do the building it sits within, the ground below or the air above. Add in that the shops, pubs, communal gardens, the building itself and those around it may all be owned by the same aristocrat, and it is not hard to see why the system is frequently characterised as a feudal anachronism.
“Further reform in coming years should enable leaseholders to extend their lease without the requirement of negotiations with the landlord. Currently, this is frequently a slow process, and the leaseholders must pay the freeholder’s legal costs as well as being subject to marriage value, whereby if the flat is under 80 years old, a leaseholder must share the uplift in value of the flat on a longer lease with the freeholder
“Of course, there will always be a need for some form of arrangement where dwellings form part of a shared building in order to ensure reasonable conditions prevail, regarding loud music, hanging out of washing, satellite dishes, maintenance arrangements etc. Accordingly, we will watch with interest the expected application of the commonhold concept in the following stage of reforms.
Widely used globally, the commonhold model allows homeowners to own their property on a freehold basis, giving them greater control over the costs of home ownership, while blocks are jointly owned and managed.
“A common frustration I see being ironed out is when a top floor flat owner wants to build into the attic. Currently, if that space isn’t formally demised to the flat and it’s owned by the freeholder then it seems very unfair that the freeholder typically insists on a share in the uplift in the value of the flat or refuses to sell. Without a freeholder, this space would belong to the other owners of shares in the freehold and the negotiations would be done with them. In the meantime, my advice for a leaseholder is to get the loft space demised as soon as possible, rather than wait for the reforms.”
Background on changes:
The Leasehold Reform Bill has passed through both houses of Parliament and are on the verge of becoming law (as of Jan 25th, 2022). Forming the first part of ground-breaking legislation being brought forward in this Parliament to reform the leasehold system, the Bill focuses on ground rent clauses within future long residential leases.
Ground rent (in excess of one peppercorn per year) can no longer be demanded as part of a new residential long lease, meaning future leaseholders will not be faced with financial demands for ground rent. Administration fees for collecting a peppercorn rent are also banned, with fines of up to £30,000 for freeholders that charge ground rent in contravention of the Bill.
Forthcoming steps in these, the largest property reforms in forty years, aim to give millions of leaseholders the right to extend their lease to a standard term of 990 years at zero ground rent, saving them thousands to tens of thousands of pounds. Currently only extensions to 90 years are possible, often at considerable cost.
The planned reforms aim to make home ownership fairer and more secure, tackling the issue of leaseholders paying high ground rents along with a mortgage, as if they are paying rent on a property they own. Historically, freeholders can increase ground rent with little benefit seen by leaseholders, along with adding costs when buying or selling the property.
A Commonhold Council, comprising a partnership of leasehold groups, industry and government, is charged with preparing homeowners and the market for the widespread take-up of commonhold. Widely used globally, the commonhold model allows homeowners to own their property on a freehold basis, giving them greater control over the costs of home ownership. Blocks are jointly owned and managed, meaning when someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too.
For further information please call the London team on +44 (0) 297 661 9388 or visit https://www.haringtons-uk.com