What do leasehold reform proposals mean for homeowners?
The Law Commission has recently put forward a range of proposals in order to reform the leasehold process, after the government requested it was simplified to provide a better deal to homeowners. We outline what the issues with the current system are, what the proposals for change are and how these proposals can benefit leaseholders.
What is leasehold and why does it need reform?
Freehold is fairly straightforward and means that you own the property as well as the land the property is built on. Leasehold is slightly more complex, as it means that although you own the property itself, you do not own the land the property is on. The land the property is built on is owned by the freeholder or landowner. A leasehold gives the homeowner the right to occupy the property for the duration of the lease.
The Law Commission is a statutory independent body that was created to review English and Welsh law, and where needed, to recommend reform. The government advised the Law Commission to review the leasehold process, as it was seen to be unfair on leaseholders. The leasehold process was making it increasingly complicated and expensive for leaseholders to manage their leasehold properties, extend their leases, re-mortgage or sell their properties. The main issues of concern with the process were:
The frequency of increases to ground rent charges, leading to escalating costs.
Unexpected and unnecessary management agents’ charges for consents and permissions.
Excessive and ambiguous one-off costs and service charges.
Delays with, and excessive charges for, management information being provided to leaseholders.
New build houses being sold as leasehold properties with excessive attached ground rents.
What are the proposals the Law Commission have recommended?
The Law Commission has reviewed the current leasehold process and made proposals for reform in order to simplify the process for leaseholders and minimise the delays in the leasehold buying and selling process. The aim is to make it easier and less expensive for leaseholders to buy their freehold, extend their leasehold or even take over the management of a block. In order to achieve this, the Law Commission has recommended reforms in several areas.
The government has been advised by the Law Commission that freeholders on housing developments where freeholders pay service costs should have the right to manage extended to them.
Leaseholders should be offered the chance to purchase the freehold first if the landlord wishes to sell it.
Long leaseholders should be easily able to extend their lease or acquire the freehold of their property.
Leaseholders should be consulted on decisions about permissions, charges and restrictions, as well as other important issues.
The Law Commission recommended that the ground rent procedure should be either abolished altogether or should be structured simply with a clear set rate. Consent and permission fees must also be reasonable and only payable where completely necessary.
Reserve or sinking funds were also recommended to be transparent and held separately. This was legislated for in the Landlord and Tenant Act 1987, but was not brought into force.
Developers should provide ‘key features’ documents for leasehold properties at the start of the selling process, describing the lease length, permission charge details, ground rent details including increase frequency, amount and method, and details on freehold purchase options.
The Law Commission recommended that houses should generally be sold as freehold properties, except in exceptional circumstances.
Considerations when buying a property
There are clearly additional costs associated with a leasehold property, but with any property purchase, it is wise to carry out a survey on the property to uncover any problems and reveal any further potential costs. A full structural survey cost will vary from property to property. A full structural survey cost for a larger, older property may be considerably more than for a smaller, newer property, for example. When considering potential costs, a survey on a flat can reveal the condition of the building itself and can highlight repair and maintenance issues which may affect service charges.
The current Housing Minister, Robert Jenrick, is considering the recommendations made by the Law Commission before the government takes any action on the process. In the meantime, when purchasing a new home, it is vital that buyers thoroughly investigate the full details of the property. It is essential to understand the implications of purchasing a leasehold property and to obtain full information on the leasehold length, ground rent charges and frequency of charges etc.