House of Commons Library

Leasehold and commonhold reform

Published Monday, December 11, 2017

This Commons Library briefing paper considers recent trends in leasehold ownership and on-going problems associated with the sector. Areas identified for possible reform are summarised, including Government proposals which were subject to consultation up to 19 September 2017.

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Leasehold tenure is growing

The Department for Communities and Local Government (DCLG) estimates that there are around 4 million leasehold homes in the private sector in England, of which 70% are flats. In 2016, around 27% of residential property transactions in England and Wales were leasehold. Because almost all flats sell as leasehold, leasehold transactions are more common in London, where 60% of transactions were leasehold in 2016. The practice is also more common for new-build properties: 46% of new build transactions were leasehold.

Leasehold houses are rarer. However, leasehold sales of new-build houses are up from 7% of transactions in 1995 to 15% in 2016. Leasehold houses are particularly common in the North West, where 32% of house transactions were leasehold in 2016. There is some evidence that developers are opting to sell new-build houses on long lease agreements as this can represent a lucrative future income stream.

Leaseholders are owner-occupiers in a landlord and tenant relationship

Owners of long leasehold properties do not necessarily appreciate that, although they are owner-occupiers, they are in a landlord and tenant relationship with the freeholder. The rights and obligations of the respective parties are governed by the terms of the lease agreement, which is supplemented by statutory provisions. The freeholder (landlord) retains ownership of the land on which the property is built. Essentially, long leaseholders buy the right to live in the property for a given period of time.

Problems associated with leasehold ownership

According to a survey conducted by the Leasehold Advisory Service (LEASE) with Brady Solicitors in 2016, 57% of the 1,244 leaseholders surveyed regretted buying a leasehold property. Leaseholders report a whole range of problems, including: high service charges and a lack of transparency over what they are being charged for; freeholders who block attempts by leaseholders to exercise the Right to Manage; excessive costs associated with administration charges and applications to extend lease agreements or enfranchise; and a lack of knowledge over their rights and obligations. The recent trend of developers selling houses on a leasehold basis has been accompanied by lease agreements that set ground rents at a relatively high level and which are subject to regular reviews, resulting in the accrual of significant ground rent liabilities for long leaseholders.

Despite a good deal of legislative actively in this area over the last 50 years, much of which has been aimed at strenghtening the rights of long leaseholders, they remain reluctant to seek dispute resolution through the tribunal system. An unfair balance of power, and potential to become liable for the freeholder’s costs are cited as barriers.

Government proposals

The Housing White Paper, Fixing our broken housing market (February 2017), included a commitment to “improve consumer choice and fairness in leasehold” and to consider “whether and how to reinvigorate commonhold.” The consultation paper, Tackling unfair practices in the leasehold market, marked the first step in fulfilling this commitment. The paper included, amongst other things, proposals to tackle the sale of new-build houses on a leasehold basis and to control ground rent levels in new lease agreements. Consultation closed on  19 September 2017. 6,000 responses were received and the Government is in the process of analysing them:

The Government’s consultation, Tackling unfair practices in the leasehold market, considered a number of issues within the leasehold sector including the sale of new built leasehold houses, and onerous ground rents. The consultation also sought views on what further areas of leasehold reform should be prioritised and why.

The public consultation, which closed on 19 September, received around 6,000 replies. We are carefully analysing the responses, and will issue the Government's response in due course.

Written Question answered on 1 November 2017

Commonhold

The Commonhold and Leasehold Reform Act 2002 introduced a new form of commonhold tenure. This form of ownership already operates around the world; for example, the Australian Strata Title system and the condominium system in America.

One of the key aims of the Act was to overcome the disadvantages of leasehold ownership. It was assumed that, once in place, commonhold would become the standard form of tenure for new-build blocks of flats. In practice, it has failed to take-off – there are very few blocks in commonhold ownership. Given ongoing issues associated with leasehold tenure, there have been many calls to review the legislation and implement changes in order to make it a workable and attractive option in England and Wales.

An urgent review is supported by the All Party Parliamentary Group (APPG) on Leasehold and Commonhold (established in 2016). In Tackling unfair practices in the leasehold market, the Government has said it will carry out a wide ranging project which will look at several issues including “improving commonhold.”

Additional leasehold reform

In Tackling unfair practices in the leasehold market the Government signalled an appetite for further leasehold reform:

We will be looking ahead to further steps needed to ensure transparency and fairness, and considering the outcome of the Law Commission’s consultation on its 13th programme of law reform over the coming months which included residential leasehold. Our intention is for a wide ranging project.

In addition to commonhold, this project will include how managing agents operate and leasehold terms and enfranchisement.

In October 2017, the Government published Protecting consumers in the letting and managing agent market: call for evidence, responses were accepted up to 29 November 2017. This paper sought views on the need to improve leaseholders’ rights in relation to the quality, price or service provided by management companies appointed by freeholders. The Government aims to “bring forward detailed proposals early next year.”

Housing policy is devolved

The Government’s proposals, if implemented, will only apply in England, although existing legislation does currently apply in both Wales and England. Scotland operates a separate regime for ownership of interdependent units – there are very few leasehold properties in Scotland.

 

Commons Briefing papers CBP-8047

Authors: Wendy Wilson; Cassie Barton

Topics: Housing, Owner occupation

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