Michael Gove has introduced the Leasehold and Freehold Reform Bill to Parliament - what does that mean for homeowners?
The government has introduced a bill to Parliament to reform the leasehold sector and make it easier for homeowners to buy their freehold.
The law - which will affect millions of property owners across England and Wales - will also increase standard lease extension terms from 90 to 990 years, and provide greater transparency over service charges. Housing campaigners have for decades called for reform of the "feudal" leasehold system, which allows a separate freeholder to own the land a flat or house sits on.
Currently freeholders can levy eye-watering maintenance and service charges in blocks of flats, and if homeowners want to extend their lease term it can be a complicated and expensive process. NationalWorld previously reported how a woman trapped in flat with same fire-risk cladding as Grenfell Tower was forced to pay up to £30,000 for its removal.
The new law will make all new houses in England and Wales freehold, other than in exceptional circumstances. Housing Secretary Michael Gove said "the bill will address the historic imbalances between leaseholder and freeholder to give homeowners a fairer deal. People work hard to own a home. But for far too long too many have been denied the full benefits of ownership through the unfair and outdated leasehold system. That’s why liberating leaseholders forms a vital part of the government’s long-term plan for housing. So this marks a landmark moment for millions of leaseholders across the country, as we unveil laws to deliver significant new rights and protections, slash unfair costs and crack down on exploitation."
The government claims that millions of homeowners in England and Wales will be given greater rights, powers, and protections over their homes as part of the most significant reforms to the leasehold system for a generation.
Grove claims the Bill will strengthen existing, and introduce new, consumer rights for homeowners by:
- Making it cheaper and easier for people to extend their lease or buy their freehold so leaseholders pay less to have more security in their home;
- Increasing the standard lease extension term to 990 years for houses and flats (up from 50 years in houses and 90 years in flats), so leaseholders can enjoy secure ownership without the hassle and expense of future lease extensions;
- Giving leaseholders greater transparency over their service charges by making freeholders or managing agents issue bills in a standardised format that can be more easily scrutinised and challenged;
- Making it easier and cheaper for leaseholders to take over management of their building, allowing them to appoint the managing agent of their choice;
- Making it cheaper for leaseholders to exercise their enfranchisement rights as they will no longer have to pay their freeholder’s costs when making a claim;
- Extending access to redress schemes for leaseholders to challenge poor practice. The Government will require freeholders, who manage their building directly, to belong to a redress scheme so leaseholders can challenge them if needed – managing agents are already required to belong to a scheme;
- Making buying or selling a leasehold property quicker and easier by setting a maximum time and fee that for home buying and selling information;
- Granting homeowners on private and mixed tenure estates comprehensive rights of redress, so they receive more information about what charges they pay, and the ability to challenge how reasonable they are.
The government will also give greater rights to those in mixed-use blocks of flats. Currently leaseholders in these buildings are barred from taking over the management of the site or buying its freehold if more than 25% of its floor space is commercial – such as shops or offices on the ground floor. The government will now increase the floor space limit to 50%, so that more leaseholders can access the Right to Manage or the right to a collective enfranchisement.
It will also ‘level up’ the rights of residents of freehold estates by granting freehold homeowners on private and mixed tenure estates the same rights of redress as leaseholders and equivalent rights to transparency over their estate charges.
The Bill will also rebalance the housing system for leaseholders by:
- Scrapping the presumption that leaseholders pay their freeholders’ legal costs when challenging poor practice that currently acts as a deterrent when leaseholders want to challenge their service charges;
- Banning opaque and excessive buildings insurance commissions for freeholders and managing agents, replacing these with transparent and fair handling fees;
- Banning the sale of new leasehold houses so that, other than in exceptional circumstances, every new house in England and Wales will be freehold from the outset; and
- Removing the requirement for a new leaseholder to have owned their house or flat for two years before they can extend their lease or buy their freehold.
While Sebastian O'Kelly, director of the Leasehold Knowledge Partnership, commented "the bill is an assault on all the dodgy income income streams of leasehold - the padded service charges, the insurance commissions and, most important of all, consulting on resetting all existing ground rents to a peppercorn, which is no monetary value, or zero. That is a potential loss of billions to the private equity punters who have elbowed out pension funds in this sector and, where identifiable at all, include some of the richest people on the planet. The open question is if owning a flat in England and Wales is this appalling under leasehold, when is a housebuilder going to stop using this utterly discredited form of tenure and sell either commonhold - like the rest of the world - or ensure flat owners get share of freehold and thus control the management of these blocks themselves."
What is a leasehold?
If you have a leasehold, you buy the property - but not the land it sits on. The land is still owned by the freeholder. Leaseholders also only have ownership of the property for a set period of time. This can range from years to decades to centuries, depending on the length of the lease, but the freeholder has the power over which period of time they want to sell the property for.
Leaseholders also usually have to pay ground rent to the person who owns the land. They also have to pay to extend the leasehold period, meaning very high costs can be accrued. If the lease expires, ownership of the property expires and is passed back to the freeholder.
Leaseholds are most common with flats, but there are leasehold houses too. It is estimated that the leasehold system is used on more than 4.5 million properties in the UK.
What is a freehold?
A freehold then is when you own the property and the land it is built on - essentially, you own your home outright. You don’t have to think about lease periods, ground rent, or any maintenance fees. This is the most common way to buy a house in the UK.
What does the Leasehold and Freehold Reform Bill mean for me?
If you're currently a leaseholder, this bill will make it easier and cheaper to extend your lease - which currently can cost upwards of £10,000. Owners will no longer have to have lived in their properties for two years to extend the lease, and the it will also make it easier for leaseholders to buy their freehold.
The standard lease extension term will become 990 years for houses and flats, as opposed to current 50 years for houses and 90 years for flats. This means once you extend your lease, you'll never need to worry about it again. It will also have an impact if you're a leaseholder in a block of flats. The government says it will give "leaseholders greater transparency over their service charges by making freeholders or managing agents issue bills in a standardised format that can be more easily scrutinised and challenged".
The bill will make it easier for leaseholders to take over the management of their building if they're unhappy with the current structure, and appoint a managing agent of their choice. The government will require freeholders, who manage their building directly, to belong to a redress scheme so leaseholders can challenge them if needed. Leaseholders will no longer have to pay their freeholder’s costs when making a claim. Gove has also said the bill will ban "excessive buildings insurance commissions for freeholders and managing agents".
Separately, the government has a consultation on capping ground rents. All new houses will be freehold unless there are exceptional circumstances.
What has Labour said?
The Labour Party has accused the government of watering down its leasehold reforms, after Gove initially said he would ban leasehold altogether. However now new-build flats will remain leasehold, and only new-build houses will automatically be freehold.
Labour said that the Conservative government first pledged to protect homeowners from "feudal" leasehold practices on 21 December 2017. After six years and 115 further press releases or announcements on leasehold, the opposition says they are still yet to deliver on the pledge.
Shadow Housing Secretary Angela Rayner said earlier this month "Labour will deliver more action on housing in six months than this crumbling Conservative government has managed in six years. After years of paper promises on housing, this King’s Speech is set to completely overlook housebuilding and backtrack on pledges made years ago. This is no time to wait. Labour’s plan would get Britain building again with a housing recovery plan, creating a generation of new towns and unlocking economic growth across Britain. We will not duck the difficult issues as the Tories have. We would abolish no-fault evictions and fix the broken leasehold system once and for all.