Commons briefing paper on Leasehold and commonhold reform - Feb 8

Trends in leasehold tenure

The Ministry for Housing, Communities and Local Government (MHCLG) estimates that there are around 4.5 million leasehold homes in England, of which 69% are flats and 31% are houses. The majority of flats in the private sector are leasehold (an estimated 94% of owner-occupied flats and 75% of privately-rented flats). Around 7% of houses in England are leasehold. However, leasehold houses are more common in the North West: an estimated 26% of houses are leasehold there.

Land Registry data tells us more about leasehold sales in England and Wales. 23% of residential property transactions in 2019 were leasehold – around 216,000 transactions in total. Almost all flats are sold on a leasehold basis, while around 6% of houses are.

There’s evidence indicating that developers had started to sell new-build houses on long lease agreements as this can represent a lucrative future income stream. The proportion of new-build houses sold as leasehold rose from 7% in 1995 to a peak of 15% in 2016. The proportion has subsequently fallen, reaching 1% in March 2020. Leasehold sales of new-build houses have traditionally been more common in the North West but have also declined. Around 75% of new-build houses sold in the North West in January 2017 were leasehold, compared with 4% in March 2020.

The Government’s commitment to legislate against the practice of selling new-build houses on a long lease may account for the change in trend (see below). It’s worth noting that leasehold sales of resale houses (i.e. not new-builds) have remained constant in this period. Between 2016 and 2020, around 7% of all resale houses were leasehold in England, rising to 29% in the North West.

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

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.

A Government commitment 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. The consultation 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 then-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 2017 Government said it would:

• 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 2017 Government published a further technical consultation paper, Implementing reforms to the leasehold system in England, on 15 October 2018. The outcome was published on 27 June 2019: Implementing reforms to the leasehold system in England: summary of consultation responses and government response.

The then-Minister for Housing, Ester McVey, confirmed the Johnson Government’s intention to take forward these measures in a Written Statement on 31 October 2019. The Conservative Manifesto 2019 contained a pledge to “continue with our reforms to leasehold”.

The Law Commission’s 13th Programme of Law Reform

Following various calls for evidence and consultation exercises the Law Commission published three final reports on leasehold reform in 2020:

• Leasehold home ownership: buying your freehold or extending your lease: Report on options to reduce the price payable (January 2020). There is also a summary report.
• Leasehold home ownership: buying your freehold or extending your lease (July 2020). There is also a summary report.
• Leasehold home ownership: exercising the right to manage (July 2020) There is also a summary report.

A further report summarises the Commission’s residential leasehold and commonhold reports and sets out how they fit with other reforms the Government has announced: The future of home ownership.

The Commission was also tasked with considering how to “reinvigorate commonhold to provide greater choice for the consumer.” The Commonhold and Leasehold Reform Act 2002 introduced 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 aims of the 2002 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 to make it a workable and attractive option in England and Wales.

The Law Commission published:

• Reinvigorating commonhold: the alternative to leasehold ownership (July 2020) together with a summary report and an open letter to lenders on taking commonhold as security.

The next steps: an intention to legislate

On 7 January 2021 the Government announced:

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. We will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course.

This was followed by a Written Ministerial Statement on 11 January 2021 in which the Secretary of State said:

The Government will reform the process of enfranchisement valuation leaseholders must follow to calculate the cost of extending their lease or buying their freehold. Taken together these measures could save leaseholders thousands of pounds, depending on the remaining term of their lease.

The Government will abolish marriage value, cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. The Government will also introduce an online calculator, further simplifying the process for leaseholds and ensuring standardisation and fairness for all those looking to enfranchise.

Existing discounts for improvements made by the leaseholder and for security of tenure will be retained, alongside a separate valuation methodology for low-value properties known as “section 9(1)”. Leaseholders will also be able to voluntarily agree to a restriction on future development of their property to avoid paying “development value”.

Leaseholders of houses can currently only extend their lease once at a “modern ground rent” for 50 years, compared to leaseholders of flats who can extend as often as they wish at a zero “peppercorn” ground rent for 90 years. I am confirming that the Government will give leaseholders of all types of property the same right to extend their lease as often as they wish, at zero ground rent, for a term of 990 years.

There will continue to be redevelopment breaks during the last 12 months of the original lease or the last five years of each period of 90 years of the extension, subject to existing safeguards and compensation.

We will also enable leaseholders, where they already have a long lease, to buy out the ground rent without the need to extend the term of the lease.

The Statement also announced the establishment of a Commonhold Council:

I am confirming I will establish a new Commonhold Council as a partnership of industry, leaseholders and Government that will prepare homeowners and the market for the widespread take-up of commonhold. I will start this work immediately, including considering legislation. I know this will take time and close working with consumers and industry, and the Commonhold Council will be the critical first step of this.

There is a commitment to respond to the Law Commission’s “remaining recommendations on enfranchisement, commonhold and right to manage in due course” and to “translate these measures into law as soon as possible, starting with legislation to set future ground rents to zero in the upcoming Session.”

On 5 January 2021, Lord Greenhalgh, the Minister responsible for leasehold, responded to questions on the timing of future legislation:

We need primary legislation. I have been told by Professor Hopkins, who was in charge of the Law Commission work, that the preparations to get primary legislation ready for consideration by noble Lords will take approximately one year, so we are probably talking about the third Session.

Other revelvant work

Mis-selling of leasehold properties

On 14 May 2019, the CEO of the Competition and Markets Authority (CMA) wrote to the Chair of the HCLG Select Committee, Clive Betts, confirming that an investigation would be carried out “to see the extent of any misselling and onerous leasehold terms, including whether they might constitute ‘unfair terms’ as legally defined.” The CMA investigation was launched on 11 June 2019. An Update Report was published in February 2020 and on 4 September 2020 the CMA announced that it was opening enforcement cases against four developers. See section 3.3 for more information.

The letting and managing agent market

In October 2017, the Government published Protecting consumers in the letting and managing agent market: call for evidence. The Government response was published in April 2018. The process sought views on measures to improve leaseholders’ rights in relation to the quality, price, and service provided by management companies appointed by freeholders.

The Government has committed to regulating managing agents in addition to letting agents “to protect leaseholders and freeholders alike”. A Working Group led by Lord Best was established to develop the regulatory regime. Membership of the Group and the terms of reference were published on 12 October 2018. The Group’s report was published in July 2019. The recommendations on the new regulatory regime are covered in section 3.13.

The Queen’s Speech on 19 December 2019 contained a commitment to introduce a Renters’ Reform Bill which would “Professionalise letting agents, to the benefit of tenants and landlords.”

Buying a leasehold property

The 2017 Government ran a parallel call for evidence between October and December 2017: Improving the home buying and selling process. The paper posed questions about buying a leasehold property with a view to exploring ways in which leasehold information might “be released to a more predictable timescale, more consistently and at reasonable cost.” The outcome was published in April 2018. The 2017 Government said it would set timescales for agents and freeholders to respond to leasehold queries and introduce maximum fees. There was an intention to introduce standard mandatory forms for leasehold information.

Consultation on this issue was included in Implementing reforms to the leasehold system in England which was published on 15 October 2018. In Implementing reforms to the leasehold system in England: summary of consultation responses and government response (27 June 2019) the 2017 Government confirmed that freeholders and managing agents would be required to provide leasehold information within 15 days and that the maximum fee for providing this information would be set at £200 (plus VAT).

Complaint resolution

A further consultation process, Strengthening consumer redress in the housing market, was launched on 18 February 2018. This process sought views on “better ways for consumers across the private-rented, leasehold, social-housing and owner-occupied sector to resolve their complaints.” A summary of responses together with the Government’s response was published in January 2019. The 2017 Government said it would create a Redress Reform Working Group to work with industry and consumers to develop a new Housing Complaints Resolution Service. The new service will “help renters in private and social housing, leaseholders, and buyers of new homes.” The 2017 Government intended to require freeholders of leasehold properties to be members of a redress scheme:

The Government is proposing to extend mandatory membership to a redress scheme to all freeholders of leasehold properties and will introduce primary legislation to this effect as soon as Parliamentary time allows.

The Conservative Manifesto 2019 contained a pledge to provide “necessary mechanisms of redress for tenants”.

Housing policy is a devolved matter

The Government’s leasehold reform proposals, if implemented, will only apply in England, although existing legislation does currently apply in both Wales and England. The Law Commission’s consultation paper(September 2018) states:

The extent to which leasehold enfranchisement is devolved to the Welsh Assembly is unclear. Aspects of enfranchisement have, in the past, been treated as a devolved issue. “Housing” was expressly devolved to Wales in the Government of Wales Act.

[…]

Our project, therefore, is intended to cover both England and Wales, and to result, where reasonably possible, in a uniform set of recommendations that are suitable for both England and Wales.

On 6 March 2018, the then-Welsh Housing and Regeneration Minister, Rebecca Evans, announced that, regarding houses which qualify for support under Help to Buy – Wales, agreement had been reached with some of the larger developers to only sell on a leasehold basis “where absolutely necessary.” On 1 May 2018 she announced that the Welsh Government had formally joined the Law Commission’s leasehold reform project. A multi-disciplinary task and finish group on leasehold reform was also established. The Task and Finish Group issued a report, Residential Leasehold Reform, in July 2019. The report is described as “just the end of the first key stage of the work” the Group is undertaking, see section 3.16 for more information.

On 14 October 2020 Julie James AM, Minister for Housing and Local Government, told the Senedd:

…we are working very hard with the leasehold reform provisions that the Law Commission has looked at. They recently reported, and we’re looking to see what can be done in conjunction with some UK legislation, if at all possible, just due to the lack of time we’ve now got in Senedd provisions to be able to do this.

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.

Labour’s new deal for leaseholders

July 2019 saw publication of Ending the Scandal: Labour’s new deal for leaseholders, which set out “Labour’s plan to end the unfairness and injustice of leasehold for good”.