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The Leasehold Controversy & The Commonhold Alternative

Carl Shave
Carl Shave
April 29, 2019
Block of blue UK Flats

Leasehold properties have, for some time, been the subject of much controversy. Between overly restrictive leasehold agreements and ever-increasing fees, developers and freeholders are considered by many to have been taking unfair advantage of the system, and of homeowners, for a number of years.

As a result, leasehold was the subject of a damning report by the government’s Housing, Communities and Local Government Committee (HCLGC), as well as a recently published consultation on leasehold reform by the Law Commission. Released in March, the HCLGC’s report outlined a number of findings and recommendations on improving the state of the UK housing market.

What is leasehold in the UK?

There are two types of home ownership in the UK: freehold and leasehold. Freeholders own the property and the land outright, without exception. Leaseholders, on the other hand, do not actually own the bricks and mortar, and essentially have to rent from the freeholder – the actual owner of the property – until their agreed lease period comes to an end.

Most flats in the UK are leasehold, as are houses bought on a shared ownership basis. According to the Leasehold Knowledge Partnership, more than six million properties in England and Wales are leasehold.

What are the criticisms of leasehold?

The main criticisms of leasehold centre on the costs and restrictions that it places on homeowners. Leaseholders typically have to pay ground rent, services charges and maintenance fees to the freeholder, with some ground rents increasingly dramatically year-on-year – in some cases doubling every ten years.

Leaseholders have to obtain permission from the freeholder before carrying out any major works on the property, and in many cases are charged a “permission fee” for doing so. Leases may contain other restrictions, such as terms that prohibit subletting or owning pets. Leaseholds – especially those with a short remaining lease term – can also negatively affect the value of a property. According to a survey carried out last year by NAEA Propertymark, 94% of people who bought a leasehold property regret doing so.

The HCLGC report

The recently published HCLGC report is the end result of an earlier government consultation on tackling unfair practices in the leasehold market, launched in 2017. In the report, the committee states that freeholders, developers and managing agents are guilty of seeing leasehold as a “steady source of profit”.

The report also asks for an investigation into the potential mis-selling of homes with punitive ground rent clauses, and calls for the current leasehold system to be replaced with a commonhold system – similar to that used in Scotland – in which the owners of flats jointly own and manage the freehold.

Other key findings and recommendations in the report include:

  • Ground rent should be considered “onerous” if it becomes disproportionate to the value of a home, affecting the leaseholder’s ability to sell their property or get a mortgage. It should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year.
  • Ground rents on newly established leases should be set at zero financial value, and the Government should establish a compensation scheme for the mis-selling of onerous ground rents.
  • The Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation. It should also indicate its view as to whether onerous leasehold terms constitute “unfair terms” and would be, therefore, unenforceable.

The Law Commission’s consultation

The government tasked the Law Commission with proposing “reforms to reinvigorate commonhold as a workable alternative to leasehold, for both existing and new homes”. The resulting consultation ended on 10 March, and both the Law Commission and the government are currently analysing the responses.

In its consultation paper, the Law Commission outlined proposals which would:

  • Make it easier for existing leaseholders to convert to commonhold and gain greater control over their properties.
  • Allow shared ownership leases and other forms of affordable housing to be included within commonhold.
  • Improve mortgage lenders’ confidence in commonhold to increase the choice of financing available for home buyers.
  • Provide homeowners with a greater say in how the costs of running their commonhold are met.
    Enable homeowners to end unattractive long-term contracts imposed by developers.

The commonhold alternative

Both the HCLGC report and the Law Commission consultation make the case for commonhold to replace leasehold as the primary model of flat ownership in England and Wales. Under commonhold, flat owners would indefinitely own the freehold of their own unit within the building or development, with ownership of – and responsibility for – common areas being shared between the residents on a joint basis.

Commonhold ownership was introduced by the government in 2002. However, due to the existing financial incentives of leasehold for developers, and unwillingness to grant mortgages on this type of property amongst lenders, only 20 commonholds have been created in England and Wales. It is hoped that the Law Commission proposals will lead to the more widespread adoption of commonhold, as well as increasing confidence in mortgage lenders.

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