The government has unveiled plans to bring the feudal leasehold system to an end and overhaul how people own their new-build homes and common areas.
Currently, the default tenure for new-build homes, particularly flats, is leasehold, but rising ground rents and unregulated service charges have made it harder to sell these properties – affecting house prices – and mortgage lenders have been more cautious about lending against them.
This has left many homeowners struggling to sell their property.
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Several governments have tried to reform the leasehold system and the previously Tory regime banned the sale of leasehold houses but the Labour government has unveiled plans to abolish leasehold and replace it with a form of ownership called commonhold.
This would effectively ban the sale of new leasehold flats and give property owners a stronger say in how their blocks are run.
Housing minister Matthew Pennycook said: “By taking decisive steps to reinvigorate commonhold and make it the default tenure, we will ensure that it is homeowners, not third-party landlords, who will own the buildings they live in and have a greater say in how their home is managed and the bills they pay.
“These reforms mark the beginning of the end for a system that has seen millions of homeowners subject to unfair practices and unreasonable costs at the hands of their landlords and build on our plan for change commitments to drive up living standards and create a housing system fit for the 21st century.”
What are the latest leasehold reforms?
The Labour government promised to finish off and fill gaps left in leasehold reforms when it came to power in July.
The King’s Speech mentioned Leasehold and Commonhold Reform Bill that promised to “bring the feudal system of leasehold to an end”.
Many of the changes promised, such as a cap on ground rents, have taken longer than expected and now the government has said the landmark Bill will be published later this year setting out the legal framework for how reformed commonhold will work.
The government will also launch a consultation to ban new leasehold flats later this year.
What is commonhold?
Currently, most new-build developments are owned under a leasehold system.
This gives the homeowner the right to occupy land or a property for a set period which reverts back to the freeholder once this expires.
The value of the property can drop and it can be hard to get a mortgage when the lease term gets lower unless property owners pay high sums to extend it or buy the freehold.
The argument for leasehold is that it makes cheaper to buy a property as it excludes the price of the land while the owner doesn’t have to worry about maintaining the common areas.
But critics have said this means leaseholders don’t own their property outright and have been forced to pay potentially escalating ground rent costs in some cases, while unknown landlords and property managers can set their own service charges and often neglect buildings.
In contrast, commonhold ownership lets buyers fully own their property outright, with no expiring term or need to save to extend a lease.
They can have a say in managing their building and have the benefit of not needing to pay ground rent or have a third-party landlord.
There are no leases, with the rights, responsibilities and rules for all property owners set out in the Commonhold Community Statement (CCS).
Each property owner becomes part of a commonhold association upon buying their home, which oversees both the governance and management of the building unless it decides to bring in a managing agent – which will be accountable to the commonholders, not to a landlord.
Commonhold homeowners will have a vote on the annual budget, which is for upkeep and for maintenance of the building, and on the charges they have to pay – equivalent to what service charges are used for under the current leasehold system.
Homeowners will also be able to effectively plan for longer-term repairs or maintenance under commonhold, and vote on issues that affect them.
This system has previously been recommended by the Law Commission and is popular in Europe, New Zealand, Australia, the US and other parts of the world.
The shift has been broadly welcomed but industry insiders warn it won’t be easy to make the transition.
Scott Goldstein, a partner at law firm Payne Hicks Beach, said: “The concern is to make sure that the system is ready to cope.
“Lenders must be encouraged to give mortgages to purchase flats held on commonhold.
“There must be robust financial controls in place to ensure commonhold blocks have the resources they need to manage their properties.
“Finally, as commonhold blocks are always run by property owners, many more of us will be involved in property management.
“The government needs to provide easy to follow resources to educate and train all of us about the rights and responsibilities of commonhold.”
Will this help current leasehold homeowners?
Banning the sale of new-build leasehold flats, once introduced, will help buyers in the future, but activists warn that the existing 5 million leasehold property owners still need support.
In recent weeks, the government has removed the two-year time period that property owners previously had to wait to extend their lease.
Leaseholders also no longer have to pay a freeholder’s legal fees when making a right to manage claim to take over the running of a development.
But it is still unclear when changes will be made on valuing lease extensions and previously promised ground rent caps.
Katie Kendrick, founder of the National Leasehold Campaign, said: “While focusing on preventing future leasehold abuses is crucial, it’s equally vital to address the plight of existing leaseholders currently bound by the inequitable leasehold system.
“Commonhold conversion mechanisms are essential to offer an escape route for those trapped, alongside tackling issues like existing ground rents, reforming the valuation process for enfranchisement and regulating managing agents. Ensuring these existing issues are resolved alongside the move to Commonhold will ensure a fairer and more equitable housing landscape for all flat owners.”
