Big reforms announced for leasehold property laws
In January 2021, the Ministry of Housing, Communities and Local Government unveiled sweeping changes that they plan to implement to the home ownership rules that, according to their press release will be part of “the biggest reforms to English property law for 40 years, fundamentally making home ownership fairer and more secure”.
Freehold or leasehold – what’s the difference?
Owners of flats and houses in England and Wales can either own the freehold which means they own the property and land it occupies or the leasehold which means they own the property and have a legal right to occupy the land but the land is owned by a third party. These reforms are aimed at leasehold property.
When a leasehold flat or house is first purchased a set term lease period is granted, typically between 99 and 125 years. Sometimes there will be a requirement for the leaseholder to pay a fee know as a ground rent to the freeholder (normally on an annual basis) and they may have to pay a fee for the consent of the freeholder if they want to change their home. Leaseholders might be able to buy the freehold or extend their leasehold period but this can be expensive and complicated.
For landowners, ground rent payments, the sale of freeholds, the cost of lease extensions and the payments for consent to change leasehold properties are all income generators for their business.
What are the changes and who will benefit?
Following a report by the Law Commission the Government is proposing the following changes:
- Giving leaseholders the right to extend the lease term to 990 years at a ground rent of zero.
- For future leasehold properties, including retirement properties, making the ground rent zero at the time of purchase.
- A cap will be introduced on the amount payable when a leaseholder extends the lease or buys the freehold and an online calculator will make it easier for leaseholders to see the cost of extension of the lease or purchase of the freehold with the calculation rates set by Government to ensure transparency and fairness. The proposal is also to abolish the so called ‘marriage value’ which is basically a premium payable on freehold purchases to reflect the fact that ownership of the leasehold and the freehold makes the property more valuable.
- Establishing a Commonhold Council that would be tasked with preparing the property industry for the take up of commonhold ownership in place of leasehold ownership. With commonhold ownership, flat owners own the freehold and blocks of flats are jointly owned and managed by the flat owners allowing them to have greater control over their own properties.
The proposals look set to become law in stages with the lease extension and zero ground rent provisions coming in first during the upcoming session of Parliament and the other changes likely to follow within the next couple of years.
While welcome news for leaseholders, these changes maybe less attractive to property developers and landowners. Retirement housebuilder McCarthy and Stone has already commented that these changes are likely to lead to higher priced homes for the elderly.
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