The Office for National Statistics (ONS) reported last month that house prices in London have fallen at their fastest pace since the financial crash a decade ago as the capital bears the brunt of the nationwide troubles in the property market during a period of Brexit uncertainty.

The ONS further reported that the number of new houses sold as leasehold has fallen sharply, amid political pressure surrounding abuses linked to tenure arrangements. Only 4.2 per cent of all newly built houses sold last year in England and Wales were leasehold, down from 13.3 per cent in 2017.

So whilst the market does its best to weather the current storm, the real estate sector is also becoming increasingly focused upon the on-going political drive to reform the traditional leasehold system in England and Wales.

The vast range of proposals are likely to cause concern and uncertainty for lenders and investors alike, albeit that they are widely welcomed by domestic leasehold owners and tenants in the private rented sector.

What reforms have been proposed?

The term ‘leasehold reform’ is most commonly being used to refer to the government’s current proposals to rework enfranchisement and commonhold legislation. However, in fact the proposed changes have been around for much longer and go even deeper into the leasehold system than might first be apparent.

The reform agenda can be traced back to the leasehold mis-selling scandal in 2017 which prompted significant media attention. It emerged that developers in the North West had been selling leasehold homes with onerous ground rents and considerable fees attached, which reportedly left many homeowners trapped in homes they couldn’t sell or afford to live in.

Leasehold Reform – A Brief Timeline

• February 2017

The government’s paper ‘Fixing our broken housing market’ is published highlighting the government’s aim to improve consumer choice and fairness in the leasehold sector.

The Secretary of State comments: “as a government committed to building a fairer society, I don’t see how we can look the other way while these practically feudal practices persist”.

• December 2017

The government publishes its consultation, entitled ‘Tackling unfair practices in the leasehold market’. This includes a range of suggested measures such as introducing legislation to prohibit the sale of new build leasehold houses and restricting ground rents in newly established leases to a peppercorn (zero financial value).

The Government also asks the Law Commission to look at leasehold legislation as part of its 13th Programme of Law Reform, including:

– leasehold enfranchisement;
– the right to manage; and
– commonhold, as an alternative form of ownership to the residential leasehold model.

• July 2018

The government publishes a paper entitled ‘Overcoming the barriers to longer tenancies in the private rented sector’ noting that “the change in size and make up of the private rented sector has led to growing need for longer, more secure tenancies than the minimum six months offered by the assured shorthold tenancy regime”.

• March 2019

The Housing Select Committee publishes its report on leasehold reform. Ultimately they recommend that the government should: “ensure that commonhold becomes the primary model of ownership of flats in England and Wales, as it is in many other countries”.

• April 2019 

The government publishes its response to the private rented sector consultation and announces that for assured shorthold tenancies it ‘will introduce a generational change to the law that governs private renting. This government will put an end to “no-fault” evictions by repealing Section 21 of the Housing Act 1988’.

• June/July 2019

The government publishes reports confirming that they will bring forward reforms to:

– ensure that leasehold is only used for flatted developments in the future, by banning the granting of new leases on houses;
– ensure that people’s homes are theirs to live in and enjoy, not designed as an income stream for third party investors, by restricting ground rents on new leases to a peppercorn; and
– work with the Law Commission to look at ways to reinvigorate commonhold and improve the process for buying a freehold or extending a lease, or exercising the Right to Manage.

What’s next?

Having carried out a comprehensive consultation the government has identified that leasehold reform is highly complex. The current enfranchisement regime alone is the product of 50 Acts of Parliament totalling over 450 pages of legislation, and the recent reports state:

“It is important that we get the detail right. Careful attention is required as these necessary reforms could have implications for many current as well as future homeowners. We also need to ensure that changes made do not have an adverse impact upon the development of much needed new housing supply.”

The next stage will be the preparation draft legislation to effect the government’s proposed reforms. The Law Commission will also publish their final reports, and assist with implementation of their recommendations later this year.

For new developments, investors may well consider that the proposals to restrict future income streams support an immediate transfer of control to leaseholders following completion.

The proposed changes to the private rented sector also suggest a return to the kind of security of tenure for tenants which hasn’t been available since the 1980s, and may put investors off purchasing property with a view to letting it on a short term basis.

What is clear is that the process of reform will be a long one, and it is unlikely that any of the proposed changes, to ground rents in particular, will be applied retrospectively. The government is encouraging freeholders and developers to sign a ‘public pledge for leaseholders’ to commit to certain actions to help existing leaseholders with onerous ground rent terms, but it remains to be seen if this will be enough.

Further Reading

• ‘A Changed World’: Property Vision explores what leasehold reform will mean for landlords, leaseholders & tenants By Charlie Ellingworth & Philip Harvey, July 2019