Is the Leasehold Being Abolished in the UK, and What are the Recent Reforms?
As the UK government rolls out ambitious reforms, homeowners and potential buyers alike are asking: What does this mean for me? Whether you're a current leaseholder, a prospective homebuyer, or simply curious about the changing face of property ownership in the UK, this article will guide you through the maze of new legislation and what it means for the future of home ownership.
Leasehold is a form of home ownership where the buyer, or leaseholder, purchases the right to live in a property for a specified period: the leaseholder doesn’t own the land the property sits on or own the property outright.
The lessor, or landlord, is typically responsible for the upkeep of common parts and the building’s structure, whereas the leaseholder is responsible for the interior of the property. At the end of the lease, ownership of the property reverts to the landlord unless the lease is extended.
Read on to discover the legal changes have been enacted around leasehold properties, and what this means for existing and future leaseholders.
Issues with leasehold
Historically, leaseholders have been vulnerable to restrictive covenants that prevent them from doing several things, such as making noise after a certain time, keeping pets or running a business from home. The most common downsides to living in a leasehold property include the following:
High ground rent
Ground rent is a yearly payment made by the leaseholder to the freeholder of the land on which the property is built. There are two main types of ground rent:
- Fixed cost, whereby the price remains the same, but the freeholder can renegotiate it if the lease is extended
- Escalating cost, whereby payments increase by a set amount at set intervals
High ground rent is a concern for many people living in a leasehold property, particularly when the amount paid incrementally increases, and escalating ground rent clauses had become more common in recent years.
Permission fees
- Permission (or consent) fees are a type of administration charge that leaseholders pay to the landlord.
- Lease agreements typically contain clauses requiring the leaseholder to ask permission to do certain things – such as subletting or selling the property – and a payment is made when submitting the request. The wording of these clauses varies, with some demanding a set amount to be paid, others a ‘reasonable amount’ and others something else.
- If the lease requires consent for alterations or extensions, for example, the landlord may charge an administration fee to consider the request and potentially amend the lease. Administration charges can also be made for late payments or for providing documentation at the leaseholder’s request.
Lease extensions and freehold purchases
- The processes of extending a lease and buying a freehold are similar for leaseholders, and both can offer more home security. However, leaseholders could historically only apply to extend or buy a property after living in it for more than two years.
- Lease extension on a property, until recently, could only be done for 50 years, so buying a freehold was often considered the more attractive option. Lease extensions can also require negotiation with the landlord, who will often set the terms of the new lease, potentially meaning higher ground rent, for example.
- Freehold purchase often means having more control over a property and, in many cases, reducing the ground rent to almost nothing, as there is no longer an external landlord. Freehold means obtaining full and sole responsibility for the property and the land on which it is built, so budgeting for future costs is necessary.
Key reforms in the 2024 Act
The Leasehold and Freehold Reform Act 2024 became law on 24 May 2024 and applies to England and Wales. The act aims to improve fairness and consumer choice regarding leasehold and to address unfair practices.
Homeowners will receive more rights, powers and protections under the Act, which makes freehold purchase easier and cheaper, increases standard lease extension and provides greater transparency over service charges.
Lease extensions and freehold purchases
- The standard lease extension for houses and flats has been increased to 990 years (up from 50 years for houses and 90 for flats). Leaseholders can now enjoy secure ownership without the difficulty and expense of future lease extensions.
- It’s now quicker and easier for someone to buy or sell a leasehold property, as there is a maximum time frame and a maximum fee for obtaining buying and selling information.
- The requirement for a new leaseholder to have owned their house or flat for two years before being able to buy has now been scrapped.
Service charges and management
- Leaseholders have been granted greater transparency over their service charges: freeholder and management agent bills must now be issued in a standardised format, making them easier to be scrutinised and, if necessary, challenged.
- It is now simpler and cheaper for leaseholders to manage their property: they are free to appoint their own management agent.
- The presumption that leaseholders will pay their landlord’s legal costs when challenging poor practice has been scrapped, encouraging leaseholders to challenge what they see as unfair service charges, for example.
New leasehold houses ban
- As of 17th July 2024, other than in exceptional circumstances, all new properties will be sold as freehold from the start: leasehold sale has now effectively been phased out by the government.
New consumer rights for homeowners
- ‘Marriage value’, which is the premium paid by a leaseholder who wishes to extend a lease with less than 80 years remaining, has now been abolished. Under previous legislation, the leaseholder and freeholder would split the marriage value.
- Complex and excessive building insurance commissions have now been scrapped and replaced with transparent and fair handling fees.
- Leaseholders who want to challenge unreasonable charges made by the freeholder can now do so without barriers.
- Homeowners on private and mixed-tenure estates will now receive more information about what charges they pay.
- Greater rights have been afforded to those in mixed-use blocks of flats.
How will the new leasehold reforms impact existing leaseholders?
The Leasehold and Freehold Reform Act 2024 has brought many positive changes for new property owners, but what does the Act mean for existing leaseholders?
Lease extensions
- As mentioned, leaseholders can now extend their lease to up to 990 years, offering existing homeowners greater security in their home. The Act has also changed the qualifying criteria for lease extensions, so many more people can apply.
- The lease extension process can be expensive, often involving legal costs and freeholder fees. The new standardised calculation for determining how much leaseholders pay will avoid the need for lengthy negotiations and give leaseholders a sense of certainty when they start the process.
Ground rent
- The 2024 Act follows on from the Leasehold Reform (Ground Rent) Act 2022, which abolished ground rent for many new residential leasehold properties in England and Wales. Ground rent has been reduced to a ‘peppercorn’ (zero financial value) upon payment of a premium and has been eradicated for leases over 21 years.
- For current leaseholders, the only way to change the amount of ground rent paid is to extend the lease or negotiate an informal lease extension with the landlord.
Service charges and management
- Landlords must provide existing leaseholders with a service charge report at the end of each accounting period. Failure to do so means that leaseholders can apply to the first-tier tribunal.
- Management agents must provide a full breakdown of costs, ensuring transparency over how bills are calculated, and landlords must provide leaseholders with a Section 20 notice if they will be affected by any work or receive a service they’ll have to pay for.
Freehold purchases
- As mentioned, existing leaseholders are now able to buy their freehold more easily, no longer having to wait two years post purchase.
- Leaseholders can ask to purchase the property at any time during their lease. If the property is a flat, a share of the freehold can be purchased; if the property is a house, the entire freehold can be bought. Leaseholders are also typically given the ‘right of first refusal’ if their landlord wishes to sell the property.
- Although the Act received royal ascent in May 2024, most of the provisions haven’t yet been implemented and will be enacted through secondary legislation.
- The previous government anticipated that most of the reforms would be effected by 2026, and the new Labour government has committed to ‘act quickly to provide homeowners with greater rights, powers and protections over their homes by implementing the provisions of the Leasehold and Freehold Reform Act 2024, offering new and existing leaseholders the promise or more security and peace of mind regarding their home.