Tens of millions of leaseholders to get new rights which may save £10,000s
Around 4.5 million people in England currently own their home on a leasehold basis – typically flat owners and some new-build property owners. That means while you own the property, you don’t own the land it sits on. The land is instead owned by a freeholder, which can be an individual or a management company, and you typically have to pay rent to them on an annual basis (known as ‘ground rent’) for a set number of years.
There’s no exact date for when the changes will come in yet, though the Government says it hopes to legislate as soon as possible. The planned reforms come after the Law Commission proposed a number of measures to make leases fairer, while the Government has also said it plans to ban leaseholds on newly built houses. See our Leasehold Guide for more info on your rights and the problems with leasehold.
Why do I need to extend my lease or buy my freehold?
If you own a leasehold property you have the right to either extend your lease or purchase your property’s freehold (or a share of it). Traditionally, only flats were sold as leasehold, but it’s applied to more and more houses in recent years.
Extending your lease becomes necessary as it approaches 80 years in length. Under this length you become liable to pay ‘marriage value’ on top of the costs of the lease extension, and your property can also become much harder to sell. However, extending a lease can take a long time and cost £1,000s as you need to pay the freeholder, and will need legal advice too.
Likewise, purchasing a property’s freehold has become more necessary in recent years because of the increasing numbers of properties sold with clauses in them that means the ground rent doubles over a certain period, often 10 years. Increasing ground rent has affected leaseholders’ ability to remortgage or sell their property.
Purchasing a property’s freehold is one way of doing away with a ground rent clause. However, the process can take months, and, as the price is not defined, it can end up costing homeowners £10,000s. Leaseholders may also choose to buy their freehold if the freeholder doesn’t maintain the building well, or charges exorbitant service charges to do so.
How are the rules set to change?
Today’s announcement is complicated and we’re still deciphering the detail – the Government’s claimed it’s all part of “the biggest reforms to English property law for 40 years”. But here’s what we know so far – we will update this story when we know more:
- You’ll have the right to extend your lease by up to 990 years – and if you do so, you won’t have to pay ground rent. Under current rules, leaseholders of houses can only extend their lease once, for a 50-year period, while leaseholders of flats can extend leases as often as they wish for a 90-year period. Today’s changes mean both house and flat leaseholders will be able to extend their lease for a new standard period of 990 years – and crucially, once they’ve done so, they will no longer have to pay ground rent.
The Government announcement today says this new right will apply to “any leaseholder” – but we’re double-checking if there are any exceptions and will update this story when we’ve heard back. It’s important to understand though that ground rent will only be stopped for those who choose to extend their lease – if you don’t, you may still be charged it.
- Part of the cost of extending a lease or buying a freehold will be capped. Both ground rent costs and the number of years remaining on the existing lease are used to calculate the cost of extending a lease or buying a freehold. But a new cap will limit the level of ground rent used in these calculations. An online calculator will be introduced to make it easier to find out how much it costs to buy a freehold or extend a lease.
- Other costs involved in extending a lease or buying a freehold will be abolished. When leaseholders buy their freehold or extend their lease they sometimes pay charges known as ‘marriage value’ and ‘hope value’, which consider the potential gain from extending a lease or purchasing a freehold. These will both be axed.
- ‘Development value’ premiums based on a property’s future value will also be abolished. Some properties have the potential to add value through further development, such as adding an additional storey, and this can add a ‘development value’ premium to the cost of extending a lease or purchasing a freehold. But once the new rules come in, if you agree not to change the property, you won’t be charged this premium.
- You won’t pay any ground rent if you buy a new retirement property. Newly leased retirement properties won’t be able to charge ground rents. But this won’t apply to existing retirement property leases.
Is the Government looking into any other leasehold issues?
The Government has also confirmed plans to restrict ground rents to zero – essentially to axe them – on all future leases. This will be brought before Parliament in the coming months. It won’t apply to existing leases though.
In addition, it’s establishing a ‘Commonhold Council’ – a partnership of leasehold groups, industry and Government – that will prepare homeowners and the market for the widespread take-up of ‘commonhold’. Commonhold is a form of ownership for flats and other multi-occupancy developments, where each property owner owns the freehold of their home and common parts of the property are owned and managed by a commonhold or residents’ association.
What about homeowners in Scotland, Wales and Northern Ireland?
Today’s changes only affect leaseholders in England. The Law Commission has recommended its proposals apply to leasehold in Wales too – we’ve asked the Welsh Government if it’s planning to take similar action and will update this story when we know more.
In Northern Ireland, it’s a similar situation to England and Wales but there may be some nuances in legislation and definitions. More comprehensive guidance can be found on the Housing Rights NI website.
In Scotland, flats are sold on a similar basis as commonhold properties are in the rest of the UK.