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Leasehold reform 2020 explained

Published: 15/08/2020

The campaign to bring up-to-date Britain's crumbling and unfair leasehold system is gathering pace, with the Government under increasing pressure to remove the shackles and liberate flats owners.

A series of landmark reports by the Law Commission has been published, calling for a shake-up of the "feudal" system. The commission believes it should be more accessible for property owners to buy out their leases.

But this road to freedom will be neither speedy nor straightforward:

What is a leasehold?

In a nutshell, most apartments are not sold outright but sold on a leasehold.  There are approximately four million leasehold properties in Britain. Owners buy the right to the property for a set amount of time and pay ground rent annually to the freeholder who is responsible for maintaining the building, from cleaning common parts to insuring the property and making sure it is fire-safe.

In most developments, the leaseholders generally pay an annual service charge to cover these costs, and in smaller-scale buildings e.g. a converted period house, they might pay bills on an ad hoc basis.

What is the problem?

  • Ground rents can be high and many are subject to periodic reviews which can lead to truly onerous levels further down the line. 
  • Freeholders will often require payment of a significant fee before allowing leaseholders to make changes to their homes. 
  • Some leases contain clauses that prevent you from being able to keep pets, and some ban you from letting out the property.
Can you extend your lease?

You can extend your lease by 90 years and remove the ground rent.  However, this is often both complicated and costly.

What you pay depends hugely on an elaborate formula linking the property's value to the length of the remaining lease and ground rent.

As well as the cost of extending the lease, you need a lawyer to deal with all the small print, and you also have to foot your landlords' legal bills.

Most people remortgage their homes to pay for the lease extension.

Failure to extend a lease can have serious repercussions.

Once the lease reaches around 80 years, it can affect the property's value. If the lease runs out entirely, the leaseholder then has to return the property to the Freeholder.

I've heard about people buying their freehold?

Residents can form a group to buy their building's freehold, becoming joint directors of a company that owns and runs the property. There are significant benefits to doing this as you can extend your leases to 999 years, you can choose your trades when maintenance is required, and do away with the ground rents.

Owning a share of freehold increases the value of an apartment. The problem is that it costs more than extending a lease, and you have to get all the neighbours to agree to the takeover.   You then have to work together with the running of the building. It can be a delicate and time-consuming scenario. However, a managing agent is usually appointed to take care of the day to day matters.

Where does the Government stand?

Three years ago, Sajid Javid, promised an end to the "feudal practice" of leasehold. He called for new rules to extend a lease or purchase a freehold to be "much easier, faster, and cheaper." The Law Commission has been asked to review the subject of leasehold reform and report back.

Has it done anything?

In 2019, the Government took action against developers selling leasehold properties, banning it altogether when the property is a house and reduced ground rents on new leases for apartments to zero. The ban isn't retrospective, leaving approximately one hundred thousand leaseholders with properties with ground rents, which in some cases, can make them hard to sell.

What happens if you are already freeholder?

The Law Commission has called for extending or buying a lease to be simplified and for the costs to be capped. For example, currently, someone with a £250,000 property with only 76 years left on the lease and paying a ground rent of £50, which will rise to £200 as the lease gets shorter, would have to pay £16,453 to buy out the lease. The Law Commission has proposed a different formula, which would reduce costs to approximately £10,000.  Campaigners say this is still far too expensive.

What is the alternative to the freehold/leasehold system?

The Law Commission proposes a new system, called commonhold, where people own the freehold of their apartment. They manage the maintenance of the building jointly or appoint a building manager. They don't have to pay any ground rent and have more control over how the building is managed.

Too good to be true.  What's the catch?

Neighbours have to work together, and getting lots of different households to agree on how to do this and how much to spend can be tricky and time-consuming. Nervous mortgage lenders have so far proved reluctant to lend on the handful of commonhold homes that already exist.

And now?

National Leasehold Campaign complains of years of "empty promises," but in the Government's defense, they have other matters on their plate right now!
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