Are We About To See The End of Leasehold Property Ownership?
The UK is on something of a political knife-edge, which may see a new Government in place later in 2019.
Quite what shape this new administration may take is totally unclear, but there is a chance that Jeremy Corbyn may find himself with the keys to No 10 if he plays his cards right. In this article, we will take a look at recent proposals by Labour and the current Government that it may seek to effectively outlaw leasehold ownership for newbuild property, with a view to understanding the differences between the two and what this may mean for current and prospective leaseholders and freeholders.
A legacy of the Middle-Ages
At present, according to official statistics, there are 4.2m residential leaseholders in England alone, with 2.9m of these being for flats. Leasehold ownership has long been viewed as a remnant of the centuries-old feudal system, whereby landowners in the middle-ages would permit tenants to reside on land under their conditions. The burden for many leaseholders of excessive ground rents, marriage value payments, and restrictions on making changes to their property has made many wary of entering into leasehold arrangements.
Only recently, a leaseholder of a flat worth £600k was forced to forfeit his property after undertaking home improvements which he had not agreed with the freeholder (who resided in the flat below). The property tribunal found the leaseholder had breached several covenants in his lease and as a result was ordered by the Court to give the freehold owner possession of the flat. While many may argue that by breaching his agreement, the leaseholder placed his ownership in jeopardy, others may reason that this was a high price to pay and illustrates the unfairness of leasehold ownership.
What have Labour proposed?
In a report entitled, ‘Ending the Scandal – Labour’s new deal for leaseholders’, published in July 2019, Labour laid out five pledges in relation to leaseholder property ownership, as follows:
- End the sale of new private leasehold houses with direct effect and the sale of private leasehold flats by the end of our first term in Government.
- End ground rents for new leasehold homes, and cap ground rents for existing leaseholders at 0.1% of the property value, up to a maximum of £250 a year.
- Set a simple formula for leaseholders to buy the freehold to their home, or commonhold in the case of a flat, capped at 1% of the property value.
- Crackdown on unfair fees and contract terms by publishing a reference list of reasonable charges, requiring transparency on service charges and giving leaseholders a right to challenge rip-off fees and conditions or poor performance from service companies.
- Give residents greater powers over the management of their homes, with new rights for flat owners to form residents associations and by simplifying the Right to Manage.
Labour’s proposals include the purchase of new property and makes provisions for existing leaseholders seeking to become freeholders and to take a greater stake in the management of their property/building.
What changes to the leasehold system has the Government proposed?
In June 2019, the Government did indeed announce proposals to seek legislation which would ensure that all new-build houses are sold freehold and ground rents on flats would be removed. One of the main differences is that the Labour proposals would mean both new-build houses and flats must be sold freehold, whereas the Government’s suggestions do not include new flats.
In terms of proposals for ground rent, Labour are proposing this be capped at 0.1% (up to £250) of the property value, whereas the Government plans to reduce these to zero for all future leases. In addition, both Labour and the current Government have proposed measures to stop freeholders and their agents charging excessive fees. The Labour plans make it clear that fees such as charging permission to allow pets, to erect a fence, and even to fit a doorbell (examples provided in the report), are deeply unfair and should be brought under control or removed completely. They also take the view that unfair contractual terms (e.g. not being able to dry washing in the garden) greatly undermine the sense of owning a home and that these need to be further limited.
Both sets of proposals are also seeking to improve the process for converting from leasehold to freehold, with the Government stating that where owners have been incorrectly sold a leasehold, they will be able to transfer to freehold at no cost. Labour, on the other hand, have recommended a formula for purchase of freehold capped at 1% of the property value, and simplification of the Right to Manage (RTM) scheme.
Both Labour and the current Government announced their proposals to shake-up the leasehold system within weeks of each other. Whether this is mere coincidence is not clear. There does appear to be more ‘flesh on the bones’ of the Labour proposals, and it includes the sale of new flats and provides more detail in relation to the prevention of unfair practices by freeholders and managing agents. Which party gets to put their plans into action, and the extent to which they do so, however, remains to be seen. Do watch this space.