Leasehold reforms promise the end of a nightmare for many homeowners

Home ownership is about to become a bit less of a headache

(Image credit: © iStockphotos)

published 16 January 2021

What has happened?

The government has announced major reforms to English property law, giving around 4.5 million leaseholders the right to extend their leases to 990 years with zero ground rents, and making it cheaper and easier to do so. It has also pledged to promote commonhold tenure (meaning, in effect, that the freehold ownership is shared) as the default tenure for the future. The reforms could mark the beginning of the end for the leasehold system, a feudal form of ownership that was spread to every corner of the globe by the British Empire, but which has since contracted again to England, Wales and Northern Ireland (and in the latter it is already far cheaper for a leaseholder to purchase a freehold).

It’s is a form of ownership under which the property’s ultimate owner (“freeholder”) extends a residential tenure to a “leaseholder” that can last up to 999 years. When leaseholders buy a flat (or, more controversially, a house) they are really buying the right to live in the home for a set period. They have to pay annual service charges for maintenance of common areas, plus “ground rent”; and every year that passes the value of the lease dwindles. Leasehold was a feudal invention that once helped barons finance the Crusades, but which still applies to around one in five homes in England. The ground rent was historically a “peppercorn” fee – a symbolic payment that acted as a reminder that the baron still claimed the land as his own.

When it comes to flats, the system makes a kind of sense even if open to abuse and administrative headaches. MoneyWeek readers may have heard nightmare stories about unresponsive or untraceable freeholders holding up sales of flats – or unscrupulous ones who levy implausible service charges or extortionate fees for lease extensions. But not all “service charges” are iniquitous or opportunistic, and switching to commonhold will not magic away the need for buildings to be maintained and insured. Service charges will still need paying and some people may well not enjoy the responsibilities that go along with part-freehold ownership.

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When it comes to houses, leasehold tenure makes no sense at all, since it offers no advantage to the owner-occupier – only extra hassle and financial liabilities. Even so, in the 2010s, Britain’s big housebuilders routinely began selling new-build homes on a leasehold basis, with ground rents that were not fixed at a peppercorn rent, but set at a few hundred pounds and doubled every decade. The only purpose was to give the builders extra profit by selling the freeholds, and the associated revenue stream, on to investors. For the leaseholders, though, it created a massive headache: the prospect of a ground rent that doubled every decade made their homes worth far less than they paid for them, or simply unsellable. Those that wanted to buy the freehold found the proposed fees (tens of thousands of pounds) extortionate. The sale of new leasehold houses was banned in 2019. But the misselling scandal – and the ongoing legal wrangling over compensation – revealed wider problems with leasehold, which the government is now addressing.

Currently, leaseholders of houses can extend their lease only once, for 50 years with a ground rent, while leaseholders of flats can extend multiple times at a zero ground rent for 90 years. Under the new legislation, due to be passed by March 2022, both will be able to extend for 990 years, meaning they only have to do it once, and all post-extension ground rents will be zero. In addition, various prohibitive additional costs such as the “marriage value” (the notional uplift in value when a leaseholder extends or purchases the freehold) will be scrapped. The government will create an online calculator, standardising the cost of lease extensions or freehold purchases. And it will create a “commonhold council” of representatives from leasehold groups, the housing industry and government to promote and prepare for the “widespread take-up of commonhold”. The real “game-changer” is the effective abolition of ground rents, says Sebastian O’Kelly, of the Leasehold Knowledge Partnership, in The Sunday Times. “If you knock out ground rents, you stop leasehold from having a future because the whole edifice of these fag-packet calculations crumble away.”

That depends on the details of the standardised calculator, yet to be finalised. But from what we know already, says Andrew Wishart of Capital Economics, it’s clear that leaseholders will gain most where ground rents are “onerous” (broadly defined as more than 0.1% of the property’s value). Taking a flat worth £250,000 with 125 years left on a 250-year lease, with a ground rent of £100 a year doubling every decade, Wishart reckons that the current cost of extending to 990 years would be £54,000. But if the ground rent were capped at 0.1% of the value (£250 a year), the costs of extending would fall to £4,920.

Similarly, the cost of purchasing a freehold should fall substantially due to the scrapping of the “marriage value”. For a £250,000 house, say, with a ground rent of £100 and 80 years left on the lease, the price of buying the freehold would fall by around £30,000. Not everyone stands to benefit from this order of saving. And the reforms will only apply to new and newly extended leases. But overall, the prospective demise of “perverse, bizarre and exploitative” leases is a welcome and overdue step, says The Times. “Owning a home should have its commonsense meaning rather than be a legal fiction that drains the… resources of those who understandably stumble in a thicket of contractual small print.”

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Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.