As originally published in Property Explorer
At the beginning of the year, the government announced its plans to reform the leasehold system to put more power in the hands of leaseholders. So, what did the guidance include, how long might it take to become law, and what are the considerations for developers?
There are 4.5 million leaseholders in the UK, who own a property where they are required to pay ground rent to the freeholder. The government has previously committed to restricting ground rents to zero for new leases, and these new reforms tackle the issues of existing leases.
The proposed changes mean that both house and flat leaseholders will be able to extend their lease to a new standard 990 years and no longer have to pay ground rent to the freeholder.
The cost of buying the freehold or extending a lease will also become cheaper and more transparent, with prescribed rates and an online calculator to help leaseholders find out how much it will cost them. Under the proposals, marriage value clauses, which entitle the freeholder to a percentage of the value increase of a property when its lease has been extended, will be abolished and leaseholders will be able to voluntarily agree to a restriction on future development of their property to avoid paying ‘development value’.
The guidance also says that there should be no ground rent payable on retirement leasehold properties, so purchasers of these homes have the same rights as other homeowners – although to mitigate the potential impact on developers, commencement of this provision will be deferred and come into force 12 months after Royal Assent of the reforms.
The government is also establishing a Commonhold Council – a partnership of leasehold groups, industry and government – that will prepare homeowners and the market for the widespread take-up of the commonhold model. Widely used around the world, the commonhold model allows homeowners to own their property on a freehold basis, giving them greater control over the costs of home ownership. Blocks are jointly owned and managed, meaning when someone buys a flat or a house, it is truly theirs and any decisions about its future are theirs too.
At this stage, the reforms are government guidance and need to go through several stages of review and sign off before they become law, including review by the House of Commons, drafting of legislation and review by the House of Lords. There may also be multiple legal reviews during this process due to the huge loss of value to private investment firms and pension funds. Overall, the process could take up to five years.
So, at this stage, the reforms are unlikely to have any real impact on developers. But it will be interesting to see how long term maintenance of the building will be covered off and what the effect will be on existing leases. I think change was inevitable given some developers had started over-charging leaseholders so however long this takes, it’s clear that the writing is on the wall for ground rent chargeable to leaseholders and developers should prepare for change.
Simon Whitfield, Head of Development Finance at Daven Trust