Last week, Michael Gove, Secretary of State for Levelling Up, Housing and Communities, declared that in this parliament, perhaps even this calendar year, legislation intending to abolish leasehold will be introduced.
What is the problem with leasehold ownership?
Fundamentally a freeholder owns their property and the land on which it stands. There is no time limit for the period of ownership. A leaseholder owns a property which is derived from the freehold. Normally this would be of a smaller unit, such as an individual flat (although it can vary from property to property) and for a set period of time, such as 125 or 999 years. Complexities around leasehold arise owing to the management and maintenance of the building and land shared by multiple leaseholders, and the various rights and responsibilities of both the freeholder and the leaseholders.
It is important to understand that leasehold property ownership is not inherently problematic and many leasehold property owners encounter no issues. Freeholders understand their obligations to keep the property in good repair and leaseholders recognise that payment of service charges removes their individual responsibility of maintaining the building, albeit removing some element of control as well.
What is the Government proposing?
Leasehold reform has been on the Government’s agenda for some time and multiple consultations have been undertaken. Mr Gove’s recent announcement has suggested that the Government is looking to go significantly further. The Leasehold Reform (Ground Rent) Act 2022 came partly into force last year and removed the payment of ground rent for new leases. During the various debates on the legislation, the Government was criticised for not bringing in more fundamental reforms. However, the complete abolition of leasehold was not proposed and has brought many practitioners to question how this will be achieved and what it will mean for freeholders and leaseholders alike.
What is wrong with the Government’s proposal?
At present, there is no draft legislation in place, and it is very difficult to understand what the proposal will look like. Mr Gove has expressed that this is a complex area saying ‘it’s not easy in legal terms because when you have a tangle of property laws going back hundreds of years, unstitching all that is difficult’. Nonetheless, simply making a statement of this kind could put people off purchasing leasehold properties and create uncertainty in the market. Equally, freeholders may be concerned with the value of their interest. It is easy to think of freeholders as caricatures complete with top hats and cigars, but freeholders will include individuals, charities, trusts and pension schemes as well as companies formed by leaseholders themselves.
The proposal to completely abolish leasehold fails to recognise that the system does work for some leaseholders who do not want to be involved in the running of the block or the potential conflicts with other leaseholders when works are required. There are rights already in place to enable leaseholders to collectively purchase the freehold of the block (enfranchisement) or take over the management (a right to manage claim). This gives the system flexibility, allowing those who wish to participate an option to do so, while allowing others to make their financial contribution without actively managing the block. The question is whether this flexibility will be lost and what additional obligations will a leaseholder be taking on if the freeholder is no longer involved?
Many people will be looking at the system of commonhold as an alternative to leasehold. This has been an option for over twenty years, but has never been fully adopted except in a handful of cases. In our view commonhold offers limited benefits compared to owning a share of the freehold together with a 999 year lease of your individual unit. There are also many protections in place for leaseholders, none of which are in place for commonhold owners. If the government wishes to reinvigorate this area of law, it will need to work hard to make the system work practically, satisfy mortgage lenders that they are a good option and ensure commonhold owners are protected from non-compliance of other commonhold owners in their building. The complexities lay in communal living not just the system in place.
What is the alternative?
No one is claiming that the leasehold system is perfect, and it is acknowledged that leaseholders have experienced unfairness owing to specific circumstances relating to their property and their freeholders. Nonetheless, to completely abolish leasehold is to ignore the millions of leaseholders who are perfectly happy with the system.
Leasehold reform is important and can be used to improve access to the rights currently enjoyed by leaseholders. For example, by reducing the qualification requirements for enfranchisement or right to manage claims or improving the process of these claims, particularly relating to estates or multi-building developments.
There is clearly a lack of understanding and misinformation as to what it means to own a leasehold property, not only the leaseholders obligations under a lease but also what rights they have. To assist with better information for leaseholders, a more standard format of lease (taking into account the nuances of individual properties) could be introduced which would improve the home purchasing process as well as making this complex legal document more accessible.
Enforcing the terms of a lease can be difficult and costly both for leaseholders and freeholders. As with anything there are rogue parties, and leaseholders should have the comfort of a system which allows this to be challenged fairly. The Government could provide an independent arbitration system to resolve these conflicts and meaningful penalties for freeholders partaking in unfair practices, and leaseholders who refuse to comply with their obligations under the lease.
Overall, these could prove more effective than abolishing the system entirely, which may negatively affect the value of leasehold and put leaseholders in a worse position with reduced protections.
In conclusion, we wait to see what the draft legislation will bring and hope that the Government recognises what the impact will be of making these types of announcements without fully understanding the full complexities of leasehold property.
Leigh Shapiro, Partner and Head of the Leasehold Team and Hayley Bruce, Practice Development Lawyer at law firm Irwin Mitchell