Almost 40% of the properties in the PRS in England are leasehold, so the chances are that if you’re a private landlord listening to this podcast, you’ll have at least one leasehold property in your portfolio.
If you do own a flat in England or Wales, or are thinking of buying one, you need to listen to this episode of the Good Landlording podcast.
This is because the government plans to “take steps to bring the feudal leasehold system to an end”, by “reinvigorating commonhold through a comprehensive new legal framework”, and replacing leasehold with commonhold. As part of this, the Government say they will ban the sale of new leasehold flats so that commonhold becomes the default tenure.
This promises have significant implications for leaseholders, should it see the light of day, and it’s something that property investors need to understand.
However, abolishing “feudal” leasehold is also a lot easier said than done, and in this episode of Good Landlording, Richard and Suzanne discuss what it all means, and what’s likely to happen in practice.
They also talk about the implementation of the Leasehold and Freehold Reform Act 2024, and plans to abolish forfeiture and tackle ground rent for existing leases.
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What we cover in this episode
Recap of what’s in the Leasehold and Freehold Reform Act 2024
The Leasehold and Freehold Reform Bill managed to get onto the statute just before the election, becoming the Leasehold and Freehold Reform Act 2024.
The Leasehold and Freehold Reform Act 2024 has the following key provisions:
At the moment the Act has only received Royal Assent, but hasn’t yet come into effect. However the Government’s July 2024 King’s Speech says “The Government will act quickly to provide homeowners with greater rights, powers and protections over their homes by implementing the provisions of the Leasehold and Freehold Reform Act 2024”.
They also say in the King’s Speech that they will “will consult on the best way to bring […] the injustice of ‘fleecehold’ private estates and unfair costs to an end […] and implement new protections for homeowners on private estates in the Leasehold and Freehold Reform Act 2024.
It’s expected that leaseholders will need to wait until 2025 or 2026 before they can exercise their rights to extend leases for up to 990 years, but the Government will be under pressure to do it as soon as possible.
The King’s Speech refers to publishing a draft Leasehold and Commonhold Reform Bill that will “reinvigorat[e] commonhold by modernising the legal framework”. They will also “restrict the sale of new leasehold flats. The Government will consult on the best way to achieve this, so that generations to come will benefit from absolute homeownership”.
The use of the word “draft” means the Bill itself is unlikely to be presented to parliament in the next year. Instead, they will publish it to enable people to comment on it as commonhold is very complex.
The new draft Bill will also contain provisions regarding ground rent and forfeiture.
>>Blog post: What will be in the new Leasehold and Commonhold Reform Bill?
The Conservatives had promised in their 2019 election manifesto that they would restrict ground rent to a peppercorn for existing leases. The 2023 King’s Speech referred to it as well, but although the Conservatives carried out a consultation onto how to restrict ground rent, it was never added the Bill. It was rumoured that the Treasury had opposed it.
Labour have been very vague about what they will do with ground rent, saying they will “tackle unfair ground rent” for existing leases.
>>Related podcast episode: Flats versus houses as landlord investments
>>Related podcast episode: Election manifesto pledges on leasehold reform
The 2024 King’s Speech briefing notes say the Government will “end the injustice of forfeiture so that leaseholders are protected against losing savings they have in their home for potentially small unpaid debts”.
The briefing notes go on to say: “Landlords need an effective way to recover debts but the fact this can happen over what might be a small breach underlines its draconian nature”.
If a leaseholder refuses to pay a sum over £350, eg the service charge or ground rent for more than three years, and they’ve admitted it’s payable, then the freeholder can forfeit the lease. There’s no set off, so the leaseholder would lose the entire value of the leasehold property, even if the lease is worth significantly more than the money they owed the freeholder.
Therefore, if someone has a flat worth a million pounds in London and they don’t pay a service charge of £500 for 3 years, they will potentially lose the flat through forfeiture.
Forfeiture shows that the balance between freeholders and lease holders is very tilted towards the freeholders. It underlines that leaseholders are in a landlord and tenant relationship with freeholders.
It’s likely the Government will introduce a simple clause to the Bill that abolishes forfeiture. It may be along the lines of what they attempted to do with Amendment NC5 of the Leasehold and Freehold Reform Bill. However, as with all of the Labour amendments to the Bill, this was voted down.
In the briefing notes to the 2024 King’s Speech, the government said they will “take steps to bring the feudal leasehold system to an end, [by] reinvigorating commonhold through a comprehensive new legal framework and banning the sale of new leasehold flats so commonhold becomes the default tenure”.
They plan to consult on the best way to go about it “so that generations to come will benefit from absolute homeownership”.
We’ve had commonhold in England and Wales since it was introduced by the Blair government in the Leasehold and Freehold Reform 2002 Act. However, it has not been popular, with under 20 blocks converting to commonhold ownership since then. The Government intends to “reinvigorate” commonhold, addressing some of the reasons why it’s been unpopular so it becomes easier and more flexible to operate.
The best way to understand commonhold is to contrast it with leasehold.
When someone buys a flat in England and Wales at the moment, they may believe they’re the owner of the flat, but they’re not. They just have a right to occupy that flat for a certain amount of time and are in a landlord and tenant relationship with the person who owns the freehold. This is also be the case for leasehold houses.
Leasehold property is a time limited wasting asset because its value falls as the unexpired time on the lease reduces. Of course, leaseholders can extend the lease, but it’s complicated and expensive.
With commonhold on the other hand, the owner of a commonhold flat is a “unit holder” who owns the freehold of their flat. It’s not a leasehold.
A well as owning their flat as a unit holder, they’re also a member of a common hold or residence association, which owns and manages the common parts of the building for all of the unit holders. With commonhold, there is no lease, and the commonhold association decides how to manage the property.
It’s a completely different concept to leasehold, and the right to manage, as the people who own the block are all the unit holders. They also have the freehold of their flat, so there isn’t a lease between the flat owners and the freeholder.
It’s not a new, groundbreaking concept as it’s very similar to the condominium structure in the USA, and the strata concept in some Commonwealth countries.
However, the way it’s been implemented in England and Wales to date has been problematic, which the Law Commission summarised in their 640 page report in 2020 Reinvigorating commonhold: the alternative to leasehold ownership. The report had 120 detailed recommendations on how to improve commonhold.
As the government will be consulting on how to modernise this this framework so it is fit for purpose, it’s a very long term project, and won’t be happening any time soon.
The Government believes that leasehold isn’t working, especially as there have been so many issues with newer developments with the freeholders treating it as an ongoing profit centre.
Doubling ground rent clauses and secret commissions on insurance have shown how much of a power imbalance between the leasehold and many freeholders.
Whilst the Government has the big picture of abolishing leasehold and replacing it with commonhold, there isn’t detailed road map to get there.
We also don’t know how the conversion of existing blocks from leasehold to commonhold will work, or how much it will cost. The process needs to be simple, and that isn’t easy. It’s not like a lease extension and will undoubtedly be great for lawyers!
It’s likely that the initial focus will be on creating new developments as commonhold, before converting existing properties. Some may decide not to convert their tenure to commonhold.
Credits
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Music: “Paradise Found” by Kevin MacLeod of Incompetech. Licensed under Creative Commons: Attribution 4.0 License.
