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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.

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