New plans announced to reform leasehold property ownership
This article was published on: 8th January 2021Matt Pugh
In England and Wales, there has traditionally been two ways of owning land: freehold (where the land is owned outright) and leasehold, which evolved from medieval feudalism, (where the land is technically ‘rented’, even if that’s on a lease of 999 years at zero rent, known as a ‘peppercorn rent’.)
The leasehold model has long been criticised, with public dissatisfaction ramping up over the last few years. There is no standard form of lease, meaning that drafting errors are common and terms can be onerous including escalated ground rent, sometimes doubling every few years. Some freeholders and managing agents neglect the upkeep of a building and common areas. We have, for example, seen examples of blocks of flats owned by offshore companies neglected to the point where common areas become a hotbed for crime, causing distress for residents and having a severe impact on the value of flats.
Money is also often a major concern for tenants, who often have to pay service charges (for maintenance of common parts) of large and unexpected amounts and ground rent as well as her own mortgage payments and outgoings.
Yesterday the Government announced long debated reforms to leasehold ownership of land in England and Wales which will see leaseholders of both flats and leasehold houses, the latter of which has been increasingly common over the past few years, able to extend their leases to a standard 990 years at zero ground rent.
There are also plans to limit the cost to a leaseholder of extending their lease or acquire ownership of the freehold (a process known as ‘enfranchisement’) by placing caps on ground rent and abolishing the traditional ‘marriage value’ calculation, as well as ensuring that retirement properties for the elderly also have zero ground rent.
Such reforms are long overdue and we eagerly await a draft bill from the Government in due course.
In 1987, following models used in Australia, the USA, and elsewhere, the Law Commission recommended that a new type of ownership known as ‘commonhold’ should be adopted in England and Wales. This was finally introduced 27 September 2004 when the Commonhold and Leasehold Reform Act 2002 came into force. Commonhold has not been taken up as widely as anticipated. However, the Government have now announced that they will seek to create a ‘Commonhold Council’ with a view to slowly replacing leasehold ownership with commonhold ownership.
Commonhold land is not a third option per se but is in effect a form of freehold land. In Commonhold, freehold ownership of a single property is combined with membership of a limited company which owns and manages the common areas. This means that the commonhold owner is, alongside others, in control of the building, and does not have to answer to a freehold landlord or managing agents. This helps leasehold house and flat owners, as they will no longer be burdened by onerous lease provisions (as commonhold documents are largely standardised) or neglectful landlords or managing agents (as the commonhold building is managed by the owners’ company).
Commonhold can be used for a range of land, including commercial properties and residential houses, but it is expected that it will be used primarily for residential flats, similar to the ‘condo’ system in the USA. Some land cannot be commonhold, such as flying freehold (where part of a freehold property is located above another property) or agricultural land.
We expect commonhold ownership to become increasingly common and to eventually replace leasehold ownership, which will provide further security and control for flat owners and leasehold house owners.
Author: Philip Copley, Solicitor