Leasehold reform 2020: what are the proposed changes and how is leasehold different to freehold?

The campaign to update Britain’s crumbling and unfair leasehold system is gathering pace, with the Government under increasing pressure to liberate owners of flats from their shackles.

A landmark series of reports by the Law Commission, the panel of experts which advises the Government on legal matters, was published last month calling for an urgent shake-up.

The commission believes it should be made easier for homeowners to buy out their leases and extricate themselves from the current “feudal” system.

But the road to freedom will be neither simple nor speedy:

Most flats are sold not outright but on a leasehold basis – owners effectively buy the right to the property for a set amount of time. They pay an annual ground rent to a freeholder who manages the building, organising everything from cleaning of hallways to insuring the property, to making sure it is fire-safe.

In big developments the leaseholders often pay a monthly service charge to cover these costs. In smaller-scale buildings – a converted period house, for example – they may pay bills on a more ad hoc basis.

It is estimated that there are at least four million leasehold homes in Britain. In London almost all flats are leasehold. Houses, by contrast, tend to be sold on a freehold basis.

Where do we start? Ground rents can be very high, there have been reports of freeholders refusing to allow owners to make changes to their homes without paying a fee, and there are often complaints about very high service charges and poor quality of building management. Some leases ban you from keeping pets or renting out the property.

Yes, usually to a maximum of 125 years, although it varies from property to property.

The issue is that the process is complex and expensive.

How much you pay depends on a hugely elaborate formula linking the value of the property to the length of the remaining lease and the ground rent.

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

Most people remortgage their home to pay to extend the lease, although this only works if the property has gone up in value since you bought it.

Failure to extend a lease has serious repercussions.

Once it dwindles to less than around 80 years it can really affect the resale value of a property – the shorter the lease the more it will impact the price. If it runs out completely the leaseholder must forfeit the home altogether.

Residents can club together and buy out the freehold of their building, becoming joint directors of a company which runs and owns the property. There are huge benefits to doing this. You can usually extend your leases to 999 years, you can choose your own builders when maintenance is needed, and there are generally no ground rent requirements. Owning a share of freehold will also increase the value of a flat. The downside is that it costs more than extending a lease and you need to get your neighbours to agree to the takeover and then work with them to run the building. This can be a very delicate, time-consuming scenario.

Almost three years ago, in September 2017 Sajid Javid, then the communities secretary, promised an end to the “feudal practice” of leasehold. He called for new rules to make extending a lease or purchasing a freehold “much easier, faster and cheaper”. The Law Commission was then asked to look at the subject of leasehold reform and report back.

Last year the Government took action against developers who sell leasehold homes, banning the practice when the property is a house, and cutting ground rents on new leases for apartments to zero. However, the ban is not retrospective, leaving an estimated 100,000 stuck in unsellable homes with crippling ground rents, and freehold flats can still be sold.

This year the Law Commission called for the process of extending or buying a lease to be simplified, and for costs to be capped. It took the example of someone with a £250,000 property with only 76 years left on the lease, who was paying a ground rent of £50 which would rise to £200 a year as the lease got shorter. Under the current system it would cost £16,453 to buy out the lease. The Law Commission proposed a different formula, which would cut costs to around £10,000. Campaigners say this is still too expensive.

The Law Commission wants to move over to a new system, called commonhold, where people own the freehold of their individual flat. They then manage the maintenance of the building jointly, or appoint a building manager. They won’t have to pay any ground rent and will have more control about how their building is run.

Neighbours will have to work together, and getting lots of different households to agree on how to do this and how much to spend will be very tricky, particularly in larger blocks. Nervous mortgage lenders have so far proved reluctant to lend on the handful of commonhold homes that already exist.

Watch this space. Campaign group National Leasehold Campaign complains of years of “empty promises” on the topic of leasehold reform. And to be fair the Government clearly has other matters on its plate right now.