Blog

Leasehold reforms: the change the system needs?

Published: 6th April 2021
Area: Real Estate & Planning

In recent years a level of controversy has surrounded the leasehold system, with some people feeling they have been cheated out of their money. As a result, a number of reforms have been proposed, including lengthening lease terms to 990 years and removing ground rent.

However, although welcome news for leaseholders, landlords could be left with a considerable drop in their income.

What is leasehold?

Initially created in 1925, leasehold enables landowners (freeholders) to make money off their land by leasing out the properties on it to those seeking a home. A contractual relationship is entered into between the freeholder and the leaseholder, with the former operating, managing and maintaining the building for a fee. Once the lease term expires, the property is returned to the freeholder, allowing them to lease it out again. At least, this was the original intention.

What issues have arisen?

 

  • Lease term length – Typical lease terms have increased from 99 years to 125 years recently, however, this is still relatively short. High street lenders become hesitant to lend once the lease reaches 80 years or less and therefore, the lease must be extended. A statutory valuation is carried out to assess the ‘marriage value’ payable to the landlord, which is a form of compensation, due to the freeholder not regaining their asset. This can be a considerable amount of money that the leaseholder did not factor in when they first bought the property.
  • Leasehold houses – Although the leasehold system suits apartments best, some house builders have recently started to offer leasehold houses. There is no justifiable reason for this, due to the leaseholder maintaining their own property. If leasehold terms were being granted at 999 years, then this may provide some justification, but as this isn’t usually the case it seems these landowners are only seeking profit from inevitable lease extensions.
  • Multiplying ground rents – A mechanism has always existed that allows freeholders to review ground rents. However, this has led to them doubling or even tripling in some cases, catching leaseholders by surprise and often reaching unaffordable levels.
What will be the impact of the reforms?

The reforms proposed by the government aim to tackle these issues head on, with standard 990-year lease terms removing the need for extensions, and the removal of ground rents. Consequently, this means there will be no nasty surprises for leaseholders.

There is no real downside to these changes for leaseholders, but they will mean that leasehold will no longer be a way for landowners to generate income from their land and property.

Land will essentially be lost to the freeholder once it is sold, and there will be no compensation to make up for this. As a result, freeholders may try to sell their properties at a higher price to balance out the loss in revenue. Lenders should stop this from happening by valuing properties at lower prices, however, this could lead to people being unable to get a mortgage, in turn causing the market to stagnate.

In short, the leasehold system is not a broken one, it merely relies on landlords using it as intended. Instead of punishing those that use it correctly, perhaps the focus should be put on stopping rogue landlords from taking advantage of their leaseholders.

No matter the consequences, these changes will make leasehold a much more permanent way to own property, moving the system far away from its original intentions.

We’re here to help

To find out more about how the proposed reforms could affect you, contact Louise Drew.

Our updated guide to recovery and resilience covers everything you need to navigate your way out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.  

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

Fire and Re-hire – the controversy and the law

21 Apr

Matt McDonald, Partner
Fire and Re-hire – the controversy and the law

So why is fire and re-hire controversial, and what do employers need to consider […]

Agriculture: Partnership Agreements

22 Apr

Peter Snodgrass, Partner & Head of Agriculture | Jennie Wheildon, Legal Director
Agriculture: Partnership Agreements

This bite size webinar is intended help you firstly identify a partnership and then […]

Build to Rent & Retirement Living

27 Apr

Louise Drew, Partner & Head of Building Communities
Build to Rent & Retirement Living

Our panel will discuss the differences and synergies between the markets and lessons that […]

AEEC (Association of European Energy Consultants) Spring Conference Decarbonising by 2050

29 Apr

Andrew Whitehead, Senior Partner & Head of Energy
AEEC (Association of European Energy Consultants) Spring Conference Decarbonising by 2050

Join us at the AEEC Spring Conference on 29 April 2021 to hear more […]

National Design Code: Beauty is in the eye of the beholder

24 Mar

Richard Cooke, Associate Director | David Pendle, Associate Director
National Design Code: Beauty is in the eye of the beholder

Design is currently a hot topic of debate, with the Government consulting on a […]

When does a mental health condition become a disability? Managing mental health in the workplace

17 Mar

Matt McDonald, Partner
When does a mental health condition become a disability? Managing mental health in the workplace

We will cover: Recognising mental health issues in the workplace, what employers can do, […]

Agriculture: Agricultural Tenancies and Tenancy Reform

11 Mar

Jennie Wheildon, Legal Director | Peter Snodgrass, Partner & Head of Agriculture
Agriculture: Agricultural Tenancies and Tenancy Reform

Peter Snodgrass and Jennie Wheildon are in conversation discussing how to identify the difference […]

Covid-19 vaccine – what employers need to know

10 Mar

Matt McDonald, Partner
Covid-19 vaccine – what employers need to know

In this webinar, Matt McDonald – partner in our employment team – will discuss […]

Our Latest Thoughts

All the latest views and insights on current topics.

Leasehold reforms: the change the system needs?

6 Apr

Real Estate & Planning

Leasehold reforms: the change the system needs?

Read article Right Arrow

Your guide to recovery and resilience

23 Mar

Corporate & Commercial

Your guide to recovery and resilience

Read article Right Arrow

Shakespeare Martineau advises on garden city joint venture

12 Mar

Real Estate & Planning

Shakespeare Martineau advises on garden city joint venture

Read article Right Arrow

Ban on evicting commercial tenants extended

11 Mar

Property Disputes

Ban on evicting commercial tenants extended

Read article Right Arrow

Budget 2021: Our thoughts

8 Mar

Corporate & Commercial

Budget 2021: Our thoughts

Read article Right Arrow