House of Commons Library

Leasehold and commonhold reform

Published Saturday, January 6, 2018

This Commons Library briefing paper considers recent trends in leasehold ownership and ongoing problems associated with the sector. It has been updated to include the Government's proposals for reform announced on 21 December 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. The Leasehold Knowledge Partnership, as a result of work with the Open Data Institute, has estimated a higher figure of between 5 and 6 million residential leasehold premises.

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 to tackle leasehold abuses

The Housing White Paper, Fixing our broken housing market (February 2017), included a commitment to “improve consumer choice and fairness in leasehold”. 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 – the process attracted 6,000 responses. A summary of the responses received and the Government response was published in December 2017. In the Ministerial Foreword, the Secretary of State, Sajid Javid, committed the Government to act on leasehold abuses:

Looking at the responses to this consultation it’s clear to me that real action is needed to end such abuses and create a system that works in the best interests of consumers. And that’s exactly what this government will deliver.

Specifically, the Government has said it will:

  • legislate to prohibit the creation of new residential long leases on houses, whether newly built or on existing freehold houses, other than in exceptional circumstances;
  • restrict ground rents in newly established leases of houses and flats to a peppercorn value;
  • address loopholes to improve transparency and fairness for leaseholders and freeholders; and
  • work with the Law Commission to support existing leaseholders. This will include making buying a freehold or extending a lease “easier, faster, fairer and cheaper.”

The aim is to seek to bring forward solutions by summer recess 2018 and then to legislate “as soon as Parliamentary time allows.”

Commenting on the Government’s proposals for reform on 21 December 2017, Sir Peter Bottomley said that the announcement had “gone further than people expected, but “it does not cover everything.” Jim Fitzpatrick said:

We will be looking to the Minister for reassurance on the 5 million leaseholders who will not be covered by future regulation and legislation and many of whom are disadvantaged and are looking to the Government to address those concerns.

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 said it would carry out a wide ranging project looking at several issues including “improving commonhold.” In Tackling unfair practices in the leasehold market: government response (December 2017), the Government said that work with the Law Commission would also “reinvigorate commonhold to provide greater choice for the consumer.”

The letting and managing agent market

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 measures that could be taken to improve leaseholders’ rights in relation to the quality, price, and service provided by management companies appointed by freeholders. The Government aims to bring forward detailed proposals in early 2018. This work will also form part of the Law Commission’s 13th Programme of Law Reform.

This paper considers recent trends in leasehold ownership and ongoing problems associated with the sector. Areas identified for possible reform are summarised, including Government proposals.

Housing policy is a devolved matter. 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 interdependent units – there are very few leasehold properties in Scotland. Leasehold apartments in Northern Ireland are a relatively recent development. The Northern Ireland Law Commission considered a review of the Law Relating to Apartments in 2013.

The Minister for Housing, Alok Sharma, commented on the prospects for leasehold reform in Wales during a Westminster Hall debate on 21 December 2017:

  • …whether Wales abolishes leasehold is a devolved matter. However, I can confirm that my officials have been working with the Welsh Assembly to inform them of our plans on leasehold, and we will continue to liaise with them.

 

 

 

Commons Briefing papers CBP-8047

Authors: Wendy Wilson; Cassie Barton

Topics: Housing, Owner occupation

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