The Leasehold Group criticises Government’s leasehold reform proposals

The Leasehold Group of Companies has warned Government’s leasehold reform proposals ‘fall well short of what is needed’ to reform sector.

They described the Government’s proposed reforms to the leasehold system as “window dressing” and has called for more detail to be provided without delay. (re timescales/how reforms will be implemented).

The Government has announced a range of proposed reforms to the leasehold system that are intended to help leaseholders to own their homes, while reducing the costs involved and making the enfranchisement process clearer and fairer. However, The Leasehold Group has expressed concerns that the proposals lack any detail and actually risk causing greater confusion to existing and potential leaseholders.

The Law Commission is of a different opinion and has welcomed reforms unveiled by the government today that will help to reinvigorate commonhold as an attractive alternative form of property ownership, by giving leaseholders the right to extend their lease by a maximum term of 990 years at zero ground rent. And it has been confirmed that a Commonhold Council will also be established to ‘prepare homeowners and the market for the widespread take-up of commonhold’. The council will comprise leasehold groups, industry and government bodies.

But Anna Bailey, Founder and CEO of the Leasehold Group, said:

“Since 2002, together with my late business partners Alex Greenslade and Louie Burns, we have enabled thousands of owners of leasehold flats to extend their leases or purchase their freeholds and are currently enabling many owners of leasehold houses to purchase their freeholds. Louie Burns, our most vociferous campaigner, would have been encouraged by today’s announcement but he would also have been the first to delve into the detail of the proposals to uncover any potential loopholes where leaseholders might be open to freeholder exploitation.

“Our highly experienced technical team has reviewed the proposals at length and there are certainly several important points to consider in this respect. While we acknowledge that progress has been made by the government’s announcement, we believe that there is a long way to go and that the devil will be in the detail as to whether the outlook for leaseholders will truly be rosy.

“Having been at the forefront of this sector and working solely for leaseholders for nearly 20 years, I am genuinely concerned that the reforms proposed will in reality change very little for ‘millions of leaseholders’ and are nothing more than window dressing. We – and the clients for whom we are working – urgently need more clarification on how, and crucially when, the reforms will actually be implemented.”

Extending leases to 990 years

The Government has announced that millions of leaseholders will be given a new right to extend their lease by 990 years and reduce their ground rent to zero, in a move it says will make home ownership fairer and more secure.

Anna said:

“Giving leaseholders the opportunity to extend their lease by 990 years is actually a moot point; a leaseholder already has the right to extend their lease by 90 years and reduce their ground rent to a “peppercorn” (i.e. zero) under existing legislation, and, arguably, there is virtually no difference in the value of a leasehold property with a 990-year lease compared to a 160-year lease.1

“In fact, the government’s proposals may do more harm than good, by creating a fourth tier or type of leasehold flat available to potential purchasers in an already confused market:
1. There are already those flats with diminishing leases of, say, 75 years, on which mortgage lenders will currently not lend (with or without ‘onerous’ ground rents);
2. There are those properties that have extended their leases by adding 90 years and reducing their ground rents to zero under the 1993 Act;
3. There are those flats that have already purchased their share of freehold collectively with their neighbours and then extended their leases to 999 years with a reduction in their ground rents to zero
4. There will now be a fourth type, whereby leaseholders will be able to add 990 years to their existing leases, resulting in a lease of over 1000 years! Surely this will add to the confusion of an already muddled and distorted leasehold property market?”

“It is also important to point out that we believe that the government has missed a ‘quick win’ in moving forward with the proposal to drop the two-year ownership rule that currently exists for owners of leasehold flats wishing to extend their leases (there is no such ownership criteria for freehold purchases of flats, with eligibility from day one).”

Abolishing ground rents

The Government has announced that any leaseholder who chooses to extend the lease on their home will no longer pay any ground rent to the freeholder but, again, this is a moot point.

Steve Jones, Director of Valuation at Leasehold Valuers (part of the Leasehold Group), commented:

“Ground rents already reduce to virtually zero under existing legislation, so, in order to curb the burdensome bureaucracy faced by leaseholders, the government should address the onerous service charges that many leaseholders are forced to endure, as well as unfair licence and permission/consent fees, and restrictive covenants imposed upon owners of leasehold houses.

“These are additional barriers to leaseholders fully owning their own homes and are the main cause of the many unfair and ridiculous expenses leaseholders are forced to pay.

“We are also concerned that the government’s commitment or ability to abolish “prohibitive costs like ‘marriage value’”, i.e. the additional amount paid to a freeholder when a lease falls below 80 years, is not explained in any detail. However, this will represent losses of billions of pounds worth of income for freeholders – and they will are unlikely to give this up without a fight.”

Online calculator

Steve continued:

“With the considerable loss of ground rent income for freeholders, it is only to be expected that they [freeholders] will somehow seek to claw back income from their investment portfolios in other ways, perhaps by influencing the algorithms agreed in the proposed online calculator, which is very likely to see deferment and capitalisation rates manipulated towards the favour of freeholders. This could have dire and unpredictable consequences for leaseholders and may even see the costs of lease extensions rise in future in some cases.”2

Leasehold houses

With respect to the reforms proposed for owners of leasehold houses, Belinda Walkinshaw, Head of Law at Leasehold Law, comments:

“There was never any justification for houses to be sold on a leasehold basis in the first place, and we believe that the rights of the owners of leasehold houses and flats are distinct and therefore that their needs are very different. Leasehold house owners in the main are only interested in owning their freeholds outright and are simply not interested in extending their leases – be it by 50 (existing right) or 990 years as proposed; flat owners, on the other hand, seek greater control and transparency over how their entire block or estate is managed.

“On a daily basis we see owners of leasehold houses hugely frustrated by the lack of statutory timeframes, which in turn leads to unnecessary and unwelcome delays. We believe that the introduction of such regulated timescales would be a quick win for the government.3

“By focusing on the matter of lease extensions for leasehold house owners, the government has actually legitimised the notion that leasehold houses are an acceptable form of ownership, firmly contradicting the much-heralded pledge by developers to no longer sell houses on a leasehold basis.

“Also, owners of leasehold houses must have owned their properties for a continuous period of at least two years before being able to exercise the right to purchase their freehold, which can delay claims and increase the price payable. Unfortunately, the Government is not proposing to abolish the two-year rule, which would give leasehold house owners the right to extend their lease or buy their freehold from the first day of ownership. Abolishing this two-year rule could have been yet another ‘quick win’ for leaseholders.”

Commonhold Council

The Government has announced that a new Commonhold Council will be formed to prepare homeowners and the market for the widespread take-up of commonhold.

Anna said:

“The concept of commonhold ownership has many benefits and the establishment of a Commonhold Council to seek to reinvigorate commonhold is a welcome move forward. However, the reasons for the lack of take up of commonhold over the years will need to be carefully explored and the statutory framework of the Commonhold and Leasehold Reform Act 2002 must be re-examined before there is any chance of successful implementation.

“The conversion of existing leasehold estates to Commonhold requires the consent of everyone with a significant interest in the property. In large blocks and mixed developments this is a huge stumbling block and almost impossible to co-ordinate and achieve. The process of registering new build estates with commonhold title may be simpler, however there is little or no incentive for developers to do so, and a fear of the “unknown” from purchasers and lenders alike.

“The composition of the Council also needs to be representative and must include a wide range of experienced, expert voices, including those leaseholders and managing agents with first-hand experience of running blocks of flats, to ensure that any proposals are realistic and workable.”

Protection for the elderly

The Government has announced that legislation to restrict ground rents to zero for new leases will also apply to retirement leasehold properties, ensuring “purchasers of these homes have the same rights as other homeowners and are protected from uncertain and rip-off practices.”

Anna added:

“Leasehold retirement properties were not previously on the government’s leasehold reform agenda, and the removal of ground rents from these properties is a welcome step. However, leasehold retirement properties are still subject to onerous exit fees (‘event fees’) payable to the freeholder such as when selling or sub-letting, which can be up to 30% of the property’s value. Exit fees are unfair and unjustifiable and should be abolished.”

In conclusion

Anna concluded:

“The Leasehold Group has been campaigning on behalf of and, more importantly, working tirelessly for leaseholders for almost 20 years and we welcome any progress towards a fairer model of home ownership for our clients.

“However, the devil is very much in the detail and it remains to be seen how the government will balance the so-called ‘legitimate rights of freeholders’ with the important objective of improving fairness and transparency for leaseholders.

“Leaseholders have been in limbo for years waiting for the government to announce how it will reform the system. Unfortunately, these proposals do not represent the paradigm shift needed to give leaseholders real ownership of their properties and the government has not given a clear indication of the timeframes for enacting new legislation. We wait with bated breath.”

The reforms have come as a result of the government working towards making home ownership fairer and more secure. The reforms that the government are implementing are said to be the biggest to the English property market for four decades.

References
1Take, for example, a 2-bedroom flat in Birmingham with a 160-year lease and zero ground rent. Its Market Value would be exactly the same if the lease length were 1060 years and the ground rent was zero.
2The Government has confidently announced the introduction of an online calculator to make it simpler for leaseholders to find out how much it will cost them to buy their freehold or extend their lease. We have acted for thousands of leaseholders and during the past ten years or so a number of concerns have been raised over the standardised online calculation of a lease extension (or freehold purchase) price. Existing online calculators do not provide for future ground rent increments or reviews and these can vary greatly from lease-to-lease, substantially affecting the level of ground rent interest applicable to the overall calculation. More importantly, deferment rates and capitalisation rates will require standardisation and what body could fairly assess these and could they be challenged if deemed unfair for any particular property at any given time?
3The sale of leasehold houses is governed by the 1967 Leasehold Reform Act, an archaic piece of legislation in urgent need of reform. It remains favourable to landlords in that it lacks the strict timeframes of the Leasehold Reform, Housing & Urban Development Act 1993, under which flat owners can extend their leases and/or purchase their freeholds. If the landlord is not cooperating then house owners do have the facility of applying to the First-tier Tribunal (Property Chamber), or the Leasehold Valuation Tribunal in Wales, and/or county court, however, the cost of taking such action will often far outweigh the price of the freehold, consequently making the court and tribunal pointless options in the eyes of many house owners.