What is leasehold?
Given that they have paid large sums for their homes, leaseholders might be surprised to find that they are in a landlord and tenant relationship with the freeholder. The rights and obligations on both sides are governed by the terms of the lease agreement – including its length. There are almost 4.9m leasehold homes in England, of which 69% are flats and 31% are houses.
What are the problems?
The post-Grenfell cladding crisis highlighted the power imbalance between leaseholders and freeholders, with leaseholders obliged to pay millions to fix cladding on buildings that they had no role in designing or constructing. The disaster revealed how many people lacked knowledge of their rights and obligations. Leaseholders also lack power over how much they pay in service charges, with freeholders accused of “sweating the asset” by maximising service charges and insurance premiums. There is a lack of transparency, and some freeholders block leaseholders’ rights to manage their own buildings.
What is ground rent?
In recent years, property developers have increasingly sold houses and flats based on lease agreements that include an obligation on the leaseholder to pay a regular ground rent. This is separate from the service charge and created an income stream for developers that allowed them to trade freeholds to global private equity investors attracted by a predictable percentage return on investment each year. Last summer a new law came into force setting future ground rents to zero on new lease agreements.
What has the government response been?
As far back as 2017, it said it would act on leasehold abuses and make buying a freehold or extending a lease “easier, faster, fairer and cheaper”, although many leaseholders would say that is not yet the case. Last summer, it said it would be “supercharging leaseholders’ ability to buy their freeholds, helping millions of households genuinely to own their own home”. Freeholders make at least £300m a year selling freeholds to leaseholders, the adviser Leasehold Knowledge Partnership estimates.
What has Michael Gove, the current cabinet minister overseeing the issue, said?
In February, when he was asked about leaseholders being landed with bills for post-Grenfell fire safety works, he told the Commons: “We hope, in the forthcoming King’s speech, to introduce legislation to fundamentally reform the system. Leaseholders, not just in this case, but in so many other cases, are held to ransom by freeholders. We need to end this feudal form of tenure and ensure individuals have the right to enjoy their own property fully.”
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What are the alternatives?
Commonhold is what many leaseholders want as it allows for the freehold ownership of flats. It has been available in England and Wales for 21 years, and while it is used widely internationally, it is less attractive to developers because it does not produce streams of cash. It is sometimes known as “condominium”. Ownership does not run out, there is no landlord (so no ground rent), and owners are in control. The commonholders make payments to a commonhold association that is made up of the same people. Money does not flow out to a landlord. As Prof Nick Hopkins, law commissioner for property, family and trust law, put it, commonhold is a culture change from “an ‘us and them’ mindset towards ‘us and ourselves’.”
How do would-be commonholders acquire their freehold?
They already have a right to enfranchisement, but the government could effectively set the freehold price to ensure it is affordable. This would allow commonhold to spread to millions of properties currently held under leaseholds, as well as newly built homes.
