This week’s news cycle has been flooded with articles on the proposed ban on new leasehold flats following the release of the latest government white paper on Monday, which looks to reinvigorate the market with a new legal framework.
Under the current leasehold system, homeowners can occupy property for a set period but don’t own it outright, facing potential ground rent and service charges, with a landlord controlling building management.
The proposed plans put forward in the white paper set to abolish the leasehold system on new developments, meaning homeowners will have an ownership stake in their buildings from the start, introducing a form on commonhold ownership, a system widespread across much of the world, which allows for full ownership with no lease expiry or ground rent, and gives homeowners a say in managing the building.
The white paper will form the basis of the government’s draft leasehold reform bill set for later this year, and while it presents promise for new and existing homeowners who have long rallied complaints at the centuries old feudal-era system, what exactly the bill will contain and how it will affect the market remains to be entirely conjecture at this stage.
To comment on the proposed leasehold ban and how it might impact not only the housing market, but also the surveying industry we hear from SDL Surveying’s Chief Executive Officer, Simon Jackson and Quality Assurance and Technical Support Liaison and Senior Regional Surveyor for London, Adam Santos.
Simon Jackson:
Whilst the full bill won’t be published until later in the year, we are only able to speculate, but the idea of removing leasehold is likely to be broadly welcomed by homeowners. There has been an array of news stories over the last few years about escalating ground rents, the level of increase in service charges, issues with the quality of service provided by property management businesses, and the unexpected and high costs associated with cladding or maintenance.
A move to commonhold will address some of these issues in that there will no longer be a ground rent. The proposed change would give homeowners more control of who is managing the building, how it gets managed, and the implications of it not being done to the homeowner’s expectations. However, there will still be a requirement for the homeowners to pool their resources to ensure common areas – stairs, lifts, corridors, entrance door and car parks are maintained and are clean and safe. Which has the potential to create its own set of issues, as the owners would need to deal with some neighbours being unwilling to pay towards the building.
I am in favour of anything which supports or increases the market for the sale of properties in the UK. The detail of this bill could make the purchase of flats much more desirable and therefore improve the sales process. Which is good for anyone, like us, whose business relies on a buoyant housing market but also supports the government’s desire to build 1.5m homes in this parliament.
Mortgage lenders will be looking for some protection from the bill. Whereby an apartment building would be required to mandatorily carry public liability and buildings insurance and to hold a minimum level of cost reserve to ensure building maintenance and therefore maintain the value of the properties.
Of course, the bulk of the talk is in relation to new build and at some point, there will be an army of homeowners who have leasehold flats that will be looking for an easier route to transfer their property to commonhold. Whilst that sounds easy, let’s not forget that the existing freeholders won’t be looking to support that change with some form of finance settlement. And so, whilst this bill is likely to be generally supported existing leasehold property owners may not be able to benefit from the details of it in the short term.
Adam Santos:
In respect to the current proposal, this is a further step toward re-balancing the marketplace for flat owners. Within the leasehold space, there is an entire industry built around supporting the management of leasehold blocks; ensuring the building and grounds are appropriately maintained. This is all governed by the terms of the lease.
Leasehold as a form of tenure is not inherently bad and it does usually provide clarity around who is responsible for what when dealing with a larger building which is occupied by various parties. Having several leases which all line into a freehold interest ensures there is accountability and consistency in how each party is treated. Unfortunately, the reality, particularly over the past 20-30 years has been that the balance of what is in the interests of the leaseholder and the freeholder isn’t always right.
Up until 2022, it was common practice by several developers to impose relatively high levels of ground rent as part of the lease, payable by the leaseholder annually to the freeholder. This rent did not contribute to maintenance or pay for any service. It was quite literally a rent for the “ground” beneath the property payable to the freeholder. The cumulative value of the ground rents from each flat helped to give the freehold interest itself some investment value and there are businesses and investment vehicles such as pension funds who take advantage of this; buying freehold interests from developers as an investment strategy.
In a bid to maximise the sale value of a freehold interest, some developers opted to build in above inflation increases to ground rent after a period of 10 or 20 years. This meant that to the initial buyer the ground rent might appear reasonable but as time went on, ground rents quickly grew and became more problematic, impacting on the saleability and mortgageability of a property.
Freeholders also have control of the management of as block, either directly or through appointment of a managing agent. Often the choice of agent was one who had the best interests of the freeholder at heart, rather than the interests of the leaseholders and this could on occasion also mean choosing more expensive services (such as insurance) because they offered a cash back incentive to the freeholder.
A move away from leasehold to commonhold for new-build property will help to resolve such issues for buyers of new property going forward. It gives leaseholders greater control, but it also means they will need to take greater responsibility. There is a danger that the collective voice of leaseholders at a block decides to postpone essential maintenance or takes other cost cutting options. This might seem favourable in the short term but might again leave some buildings and the flats within unsaleable and unsuitable for mortgage lending. This is something buyers of such properties will need to be cautious of and they will need to satisfy themselves that the building is both well maintained and has a good structure of proactive management in place.
Many articles reporting on the new regarding the reform to leasehold flats reference the continual increases in service charge as a capitalization practice of the current leasehold system. However, this service charge is often a result of heightened insurance costs, a hang-up of the cladding crisis in many instances. A move to a different form of tenure might afford leaseholders more choice in insurer and the terms of insurance that are agreed, but ultimately the charges will still be dictated by the market and may therefore remain high.
Where the legislation falls short is resolving issues for leaseholders in existing properties. This is unfortunately a much more challenging matter to resolve as whilst some would argue for leaseholders to be gifted the freehold interest or for it to be sold at a discount, there are inevitable casualties of such action as there are those who have legitimate investments in freehold interests who would be impacted.
For leaseholders in this situation there is of course already a mechanism to enfranchise and collectively buy the freehold, at the market value but naturally the cost of this is not something all leaseholders will be willing to bear. For leaseholders who are not able or willing to go this route they can opt to set up a Right to Manage Company (RTM) and this would enable them to take control of the management of the block, choosing their own favoured managing agent and having oversight of expenditure whist ownership of the freeholder interest (and payment of ground rent) continue unchanged.
A step forward, but to where?
While the white paper has been applauded as a step forward for UK homeownership and an escape for those trapped in leaseholds, it also brings forward many questions pertaining to how the new system will be implemented and how exactly it will address converting existing leaseholds to conciliate all parties.
Though there is much hopeful anticipation in what has been outlined so far, the proof is in the pudding, and further scrutiny will have to wait for the framework to be fully baked into the draft bill to be put forward later in 2025.