Leasehold reform proposals: Fairer for all?
Leasehold is a system that isn’t widely understood by those who own or seek to own their own home. There have long been calls for it to be more transparent and fairer. The call got louder when it emerged that in some instances home buyers were tied into paying onerous ground rents whilst unable to buy their freehold.
The Law Commission has prepared a number of proposals for the Government to change the system and make it more transparent and less costly for homeowners. It has also proposed changes to the commonhold system as an alternative to leasehold.
A new law banning the sale of new build properties with ground rents is already due to come into force in April this year but the Government wants to make it easier and cheaper to extend leases and buy out freehold for those who already own a property. It also wants to remove unjustified clauses in leaseholds such as the owner paying a fee to agree to alterations in their home.
Under current enfranchisement qualification criteria, there are restrictions on the number of flats you can own in one block but the aim is to lift these restrictions so it won’t just be individual owners who benefit from an easier and cheaper path to buying out freeholds or extending leases.
It is also proposed that the distinction between flats and houses is also removed so they are treated the same. And at the moment you are restricted to a 90-year lease extension with the proposal to extend that to 990 years.
There aren’t guarantees and they may be watered down but some form of law change is inevitable in the next few years.
While there is general agreement the process needs to change and the system needs to be made more transparent, the main contention is in the valuation of exercising lease extension and enfranchisement rights. In looking to make it cheaper and easier for homeowners, landlords potentially face being forced to sell their assets below market value.
Will it be giving with one hand and taking with another as institutional money is invested in leasehold?
"There's one argument that you're giving people a benefit as individuals but they're actually going to lose pension income as that is the kind of money often invested in these income streams," says Kyle Holling, Partner at Trowers & Hamlins. "While consumer protection is really important, the argument that the investment sector would make is that the goalposts have been moved after they've paid market value."
And it isn’t just institutional investors who have freehold portfolios, there is a whole range of investors who could potentially lose out as well as landowners including local authorities.
An additional hit to landlords could be in the proposed changes to costs. At the moment the landlord can recover their reasonable costs in all of these types of claims from the leaseholder.
"One of the commission's options is to either completely get rid of that regime so the landlord pays their own costs or have a fixed cost regime," says William Bethune, Senior Associate at Trowers & Hamlins.
If a landlord is being forced to sell an asset or extend the lease should there be some kind of compensation? For the time being the changes to ground rents and proposals for leasehold reform isn't deterring investors with the market still active.
"Some may be looking to add to their ground rent portfolio while they still can. We have a lot more transactions going through than we've seen in recent years," says Suzanne Benson, Partner at Trowers & Hamlins.
Over the longer term, value changes can be priced in but that doesn’t help with the shorter-term impact. The Law Commission has made several proposals for the way valuations are calculated which currently lie with the Government to make a decision. At the moment shared-ownership properties are the only exemption which could be problematic for other specialist sectors such as retirement living.
Shared ownership requires a leasehold structure as that is what differentiates it from a straightforward mortgage structure. "It is what makes it easier for registered housing providers to offer it as an affordable housing product," says Benson.
And shared ownership is a model the Government is keen to promote as part of its manifesto to make homeownership more accessible.
All eyes will be on what options the Government chooses to reform leasehold and in particular the process for valuations. It is a complex system to untangle and one which has far-reaching consequences.
Commonhold was introduced in 2004 but the uptake has been virtually nil and the Government is looking at ways to make it more attractive. Under commonhold, each unit owner owns the freehold to their property and a commonhold residents association manages the building.
The main problem is that it’s unfamiliar to the market. "Lenders have to understand it, to lend on it and so do the customers and that’s competing with leasehold which is familiar and understood," says Holling.
"Developers can choose between selling commonhold which would be harder or selling commonhold. Even if leasehold doesn’t carry the same ancillary benefits as leasehold such as selling ground rents, there's a question about whether commonhold will become more mainstream."
Some of the ancillary benefits of leasehold are potentially being removed with the reforms but there is still work to be done to make commonhold both more familiar and attractive to developers, lenders and owners.
Retirement living leasehold conundrum
The retirement housing with care sector has asked for an exemption from the ban on leasehold houses because their relationship with the leaseholder is different from a conventional property. The landlords often provide on-site services to meet the different needs of older residents. These are operational businsses providing a range of services far beyond normal property management, such as on-site care services, but also including things like bar and restaurant facilities.
As a result, the sector is starting to use different financial charging structures to factor in the risk of supplying these additional services while seeking to provide customers certainty about costs – again this is unlike conventional property where the leaseholder is responsible for the costs of management, whatever they might be.
"They need leases to secure those structures," says Holling. "It's very difficult if you're selling apartments and bungalows in the same development – which they often do – to have different legal structures governing the relationships with customers based on the type of property they own."
There is also the risk that if retirement living isn’t exempt from the leasehold reforms it could make certain properties unliveable for residents with particular needs, if the result is that a group of owners can take over management and dispense with services such as care and support which are essential to other residents.
"These specialist housing sectors are often about taking the responsibility away from the customer, providing a lifestyle choice where the customer is paying to have certain things taken care of," says Holling. "You've got to be careful that in solving the leasehold problem for the majority of people, it doesn't create more problems for the rest."