The UK government has recently announced it proposes to make changes to the law governing ground rent for leasehold properties. This is one of the biggest reforms to English property law for 40 years.
In recent years, there has been a growing discussion about ground rent terms contained in leases, as well as the costs incurred when trying to extend a lease. The government’s proposals should help those with shorter leases fearing bills of many thousands of pounds.
What is the difference between Freehold and Leasehold Properties?
When buying a property in England or Wales there are two main types – freehold and leasehold.
Freehold is when someone owns the property outright, including the land it stands on, for an unlimited period.
Leasehold is when someone doesn’t own the land the property is built on. With a leasehold, the person has an agreement with a landlord who owns a lease, which gives them the right to use the property. A leaseholder is essentially someone who rents the property from the landlord for a number of years, decades or centuries. They would have to get their landlord’s permission for any work or changes to their homes.
Issues with Leasehold Properties
Most flats in the UK tend to be leaseholds. Houses can also be leasehold and usually are if they’re bought through a shared ownership scheme. When a leasehold flat or house is first sold, a lease is granted for a fixed period of time. This is typically between 99 and 125 years, but can be up to 999 years. People can extend their lease or buy the freehold, but this can be complicated and expensive.
Leasehold house owners have to pay annual service charges for maintenance of common areas, and they are charged expensive ground rent, plus additional fees if they want to make changes to their homes. A leasehold house can also be more difficult to sell.
In recent years, the leasehold sector has been plagued with issues. Thousands of leasehold homeowners have complained about being mis-sold about the terms of their lease. In 2019, there was evidence suggesting that people who bought leasehold properties were being misled and taken advantage of.
Currently, when a homebuyer purchases a leasehold property, they do not possess it outright. Instead, they gain the right to occupy it for a set number of years. They can extend their lease by applying to their freeholder and negotiating a fee.
Part of this fee is called the marriage value – representing the increase in the value of the property once the lease has been extended. Under the government’s plans, the marriage value will be abolished – following recommendations by the Law Commission.
Last year, the government announced plans to ban the sale of new houses as leasehold. Only flats will be able to be sold on a leasehold basis – though these reforms are yet to be made law. Recently, they have laid out additional proposals to make it easier and cheaper for leaseholders to extend a lease, buy a freehold, or do away with ground rent. These proposals have also yet to come into effect.
Under the proposed changes, both flat and house leaseholders will be given the right to extend their lease to a maximum term of 990 years at zero ground rent. This would enable people to own their home without unnecessary and unfair expenses. Currently, leaseholders of houses can only extend their lease once, by a 50-year period, while leaseholders of flats can extend them as often as they wish for a 90-year period.
Many who extend their lease or buy their freehold will pay less. A number of charges involved in the cost of extending a lease or purchasing a freehold will either be capped or abolished. At present, it can cost thousands of pounds to extend a lease.
How these changes can benefit you
In January, it was announced that up to 4.5 million leaseholders would be given the right to extend their lease by up to 990 years at zero ground rent.
This means they won’t have to pay any ground rent to the freeholder, which could save them tens of thousands of pounds. A cap will be introduced on ground rent payable when a leaseholder chooses to either extend their lease or become the freeholder. It was also announced that there will be a new online calculator that would make it simpler for leaseholders to find out how much it will cost to buy their freehold or extend their lease.
Although developers say leasehold properties can work for many people, the government has already stated that ground rents should be set to zero for new leases. This proposal will also benefit retirement leasehold properties – homes built specifically for older people – so purchasers of these homes will have the same rights as other homeowners and will be protected from uncertain and so-called ‘rip-off’ practices.
Progress for Leasehold Property owners
The reform is long overdue and even though the legislation will be brought forward at this stage, there is no definite date as to when the proposals will become law.
When buying a leasehold house or leasehold flat, it is important that you have a full understanding of the existing lease provisions and your solicitor should provide you with a clear and concise explanation of your lease and the payments you would be expected to make under it to the freeholder.
If you have any questions or would like any advice about the new leasehold reforms, you can speak with our team of specialists. Whether you are considering buying or selling a leasehold property, our residential property team can advise on considerations, as well as potentially helping you to become the freeholder.
You can call us on 0161 969 3131 or fill in our contact form and we will be in touch.