The end of toxic leaseholds has been announced by the Government – much to the delight of long-suffering homeowners.
Housing minister Robert Jenrick said the new laws are being introduced to banish the ‘scandalous pitfalls of leasehold’ and ‘put fairness back at the heart of the housing system’.
The changes have been widely welcomed as good news for leaseholders, who have long endured issues such as doubling ground rent and extortionate costs to extend their leases.
New legislation: The end of toxic leasehold homes has been announced by the Government
WHAT IS A LEASEHOLD HOME?
A leasehold property has some key differences compared to a freehold home.
If you buy a leasehold property, you will need to know about things such as ground rents and lease extensions.
Here we explain some of the terms you need to know:
Unlike a freeholder, as a leaseholder you do not own the land the property is built on. A leaseholder essentially rents the property on a lease for a number of years, often between 90 and 120 years but it can be as high as 999 years.
2. Ground rents
Ground rent is the rent paid under the terms of a lease by the owner of a building to the owner of the land on which it is built. The amount paid depends on the terms of the lease.
3. Lease extensions
A lease extension refers to a legal agreement that extends the term of an existing lease.
4. Buying the freehold
If you buy a freehold property, it means you owns it outright, including the land it is built on. You are responsible for maintaining your property and land, so you’ll need to budget for these costs.
If you’re a leaseholder, you may want to consider buying your freehold. There are pros and cons of doing this, as while you may end up having more control, there will also be more effort involved. More information on buying your freehold can be found here.
The changes being introduced by the Government will enable homeowners to extend their leases up to 990 years at zero ground rent.
Miles Robinson, of mortgage broker Trussle, said: ‘We welcome the news that homeowners will be given further rights, enabling them to extend leases up to 990 years at zero ground rent.
‘It’s a significant change which will put a stop to unnecessary charges, and will make owning and selling a home easier and fairer for millions of people.’
Katie Kendrick, of the National Leasehold Campaign, said: ‘For far too long leaseholders have been told that it is their own fault for signing these toxic agreements, but this announcement proves how flawed this system is and is the start of the end for leasehold.
‘We are delighted that Government has committed to delivering these reforms in this Parliament and urge them to strongly reject the fierce lobbying and delaying tactics they will get from the sector determined to keep the leasehold gravy train running.’
In recent years, the pitfalls of leasehold have left many of those who own this type of property unable to sell their homes.
This is because lenders have been increasingly nervous about lending on leasehold homes due to the increasing costs associated with them and buyers have been put off too.
We take a look at the Government’s announcement and what it could ultimately mean for leaseholders.
Why has the Government decided to take action?
The Government said reform of the leasehold system was required to ‘end some of the worst practices faced by homeowners’.
It claims that the changes are part of the biggest reforms to English property law for 40 years, and will lead to a new system altogether.
It follows a Law Commission report last year that claimed the ‘medieval’ leasehold system was not working. It followed years of campaigning for change, particularly after the scandal of new-build houses sold as leasehold rather than freehold emerged.
Announcing the changes, the Government said: ‘Under the current law many people face high ground rents, which combined with a mortgage, can make it feel like they are paying rent on a property they own.’
The changes will aim to reduce this financial burden currently placed on many leaseholders.
How much will ground rents be under the new law?
The Government says any leaseholder who extends their lease will ‘no longer pay any ground rent’ to a freeholder.
Ground rents can currently run into hundreds if not thousands of pounds a year, and can increase sharply over time depending on the clause in the lease.
The Government has said it will reduce ground rents to zero because this will allow those who want to own their own home to do so ‘without cumbersome bureaucracy and additional unnecessary and unfair expenses’.
How much could this save leaseholders?
The changes could save leaseholders ‘thousands, to tens of thousands of pounds’, the Government has claimed.
Exactly how much has yet to be revealed but the housing minister has said that he wants to reduce the expense of being a leaseholder.
Mr Jenrick said: ‘We want to reinforce the security that home ownership brings by changing forever the way we own homes and end some of the worst practices faced by homeowners.’
Do the changes mean a longer lease extension?
Under the current rules, leaseholders of houses can only extend their lease once for 50 years with a ground rent.
At the same time, leaseholders of flats can extend as often as they wish at a zero ‘peppercorn’ ground rent for 90 years.
The changes mean leaseholders will be able to extend their lease to a new standard 990 years with a ground rent at zero.
What will be the cost of extending the lease or buying the freehold?
Many leaseholders seek to extend their lease or buy the freehold.
This can be for a number of reasons, not least to gain more control of the management of the property or to make it more attractive to potential buyers (as lenders will not lend on shorter leases).
Extending the lease is also a condition of reducing the ground rent to zero under the Government’s reforms.
However, extending the lease is something that leaseholders will have to pay to do.
You may decide to buy the freehold first before then extending the lease to take the freeholder out of the equation altogether in the future. You do not have to buy the freehold to extend your lease.
The Government has said that it will ‘cost less’ to extend the lease or buy the freehold than previously – and the cost will be calculated via a new online calculator.
Where can I find the online calculator to work out these costs?
The online calculator will help leaseholders work out how much it will cost to buy their freehold or extend their lease.
However, it will not be introduced until the changes become law, and so leaseholders will need to wait until then to find out the cost.
The current calculation includes elements such as the ‘marriage value’, which increases the cost.
The marriage value is the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease.
This element is being abolished as the Government has described it as a ‘prohibitive cost’ and wants to ensure that the calculation is ‘fairer, cheaper and more transparent’.
Is commonhold still an option?
The housing minister wants to increase the number of commonhold agreements, a little-known form of ownership that allows residents of apartment blocks to maintain it themselves or employ a maintenance firm to do it.
It would mean that if the company fails to do the job properly, the residents could sack them.
The Government is establishing a Commonhold Council to help encourage homeowners and the market to take up commonhold.
When will the new law be introduced?
Leaseholders welcomed the news and called for the changes to be passed into law immediately.
Leaseholder Jim Iillingworth said: ‘I welcome the announcement. The Government has proved with Covid and Brexit that it can pass legislation in hours and days. Why should leasehold reforms take any longer?’
In reality, the timetable is likely to take months and could possibly run into next year.
Mr Hayward, of Propertymark, explained: ‘Laws will be introduced when the parliamentary timetable will allow. But they will want to move soon on this ahead of the next General Election to appeal to the electorate.’
Leasehold expert Bernie Wales, of BW Residential, said: ‘The changes are good news for leaseholders. Leaseholders have waited a long time for them and let’s hope the Government will bring them into law sooner rather than later.’
The Government has confirmed that legislation will be brought forward in the upcoming session of Parliament to set future ground rents to zero. This is the first part of seminal two-part reforming legislation in this Parliament.
How many people will be affected by the new law?
Nearly 4.5million leaseholders could be ‘tens of thousands of pounds’ better off, according to the Government.
Will ground rents also be reduced on retirement homes?
The changes will include measures to protect those living in retirement leasehold properties, which are specifically built for older people.
The Government says buyers of these homes will now have the same rights as other homeowners.
However, Mr Hayward added: ‘While we welcome the Government’s initiative to reduce ground rents to zero for all new retirement properties, we would argue this needs to be extended to all retirement properties to create a level playing field.’