The Leasehold and Freehold Reform Bill is working its way through the parliamentary process. With it comes the promise of long overdue change for the UK’s housing market that could benefit millions of leaseholders dealing with inflated ground rent charges. But what, exactly, does this landmark bill entail? And how likely are we to see it impact property soon?
Even now, the Leasehold and Freehold Reform Bill faces opposition from various parties within UK politics. Some opponents threaten to block or modify its terms before it’s enacted. With an estimated 10 million people in the UK living in leasehold properties, however, any decision or action related to the bill could have major ramifications for housing market stakeholders.
Want to know what to expect if and when the Leasehold and Freehold Bill makes its debut? Perhaps you’re a leaseholder or freeholder who wants to vote for a healthier wallet. Your asset management partners at Concept Capital Group are ready for a deep dive into this upcoming legislation.
What is the Leasehold and Freehold Reform Bill?
Introduced to the House of Commons in November last year, the Leasehold and Freehold Reform Bill is the culmination of an early promise outlined in the Conservative Party Manifesto back in 2019. At the time, the party promised to “reduce ground rents to a peppercorn rate” to help fight the increase in ground rent costs facing a growing number of leaseholders.
The bill aims to “improve consumer choice and fairness in leasehold” by introducing key provisions to the leasehold market that would:
- Make it cheaper and easier for leaseholders to extend their lease and purchase their freehold from owners
- Increase the term of the average lease extension to 990 years
- Reduce ground rent to a peppercorn rate, which would have zero financial value and minimal impact on leaseholders
- Change the criteria required to extend leases, buy out freeholds and take over the management of a building by leaseholders
- Ban the development of new leasehold properties
- Improve the transparency of any administration, estate and service charges billed to leaseholders
- Improve the flow of key information to leaseholders, granting them the right to request information about service charges and building management
- Ensure relevant property sales information is shared with leaseholders and freeholders on estates in a timely fashion
- Ensure leaseholders are not subject to undue legal costs by providing avenues to reclaim legal costs from their freeholder
- Ensure rent charge owners cannot take possession of or grant a lease on a freehold property where the rent charge remains unpaid for only a short period
- Give freehold homeowners paying for the maintenance of communal facilities the right to challenge the reasonableness of charges and standard of services provided, and the right to appoint a substitute manager via tribunal when their estate management company falls short
- Strengthen leaseholder protections established in the Building Safety Act 2022
How the Bill May Affect Leaseholders
As the terms of the bill imply, leaseholders have had to weather a financial storm thanks to a lack of regulation in the leasehold market. Recent years have seen many stories about the hardships faced by leaseholders publicised. And, regardless of the specific circumstances of the story, a common thread of financial hardship weaves through each of them. That thread is excessive ground rent.
According to a recent report by British competition watchdog, the Competition and Markets Authority (CMA), ground rent is “neither legally nor commercially necessary.” Despite its supposed lack of purpose, ground rent has frequently been used to lock leaseholders into unfair agreements and practices. Though over 21,000 households have been freed from what the CMA has dubbed “problematic leasehold issues” since 2019, a Sky News report highlights that the overall number of leasehold dwellings has risen by 700,000 since 2017/18. This growth only reinforces the mounting demand for reform among leaseholders.
At the time of writing, the peppercorn cap proposed by the Leasehold and Freehold Reform Bill would save leaseholders approximately £5.1bn in ground rent over 10 years. Given that 85% of all leaseholders in England and Wales currently report paying ground rent, the average saving per those estimated 4.5 million households would amount to £1,136. This is not to be sniffed at amid an unprecedented cost of living crisis where housing costs often impose the biggest burden.
With some leaseholders being threatened with the complete forfeiture of their homes over unpaid charges as low as £350, perhaps the most welcome change the Leasehold and Freehold Reform Bill might introduce would be an increased purview for leaseholders to purchase their freeholds outright and challenge their current freeholders. A surprising 54% of leaseholders encountered problems with service charges according to a 2019 survey by the Homeowners Alliance, so the improved flow of information would likely reduce the number of forfeitures over negligible pay disputes by a significant margin.
How the Bill May Affect Freeholders
According to the most recent government survey of leasehold properties, leaseholds make up 20% of the English housing stock, with the highest proportion of dwellings found in London and the North West. While the majority of leasehold dwellings were owner-occupied, 37% were privately owned and let in the private rented sector, representing significant involvement from private property investors within the leasehold market.
As outright owners of the properties in question, freeholders could stand to lose major investment capital as a result of the Leasehold and Freehold Reform Bill coming into effect. With the proportion of new-build houses sold as leaseholds reaching a peak of 15% in 2016, the number has since fallen to a low of less than 1% in December 2022. This dip in concentration has been hard felt by the nation’s freeholders. The crackdown on ground rents covered by the Freehold and Leasehold Reform Bill could worsen their circumstances by seeing them lose £27.3 billion in assets for a total hit of £32.4 billion.
What’s Holding the Bill Back?
As with most bills that aim to introduce sweeping legislative changes, the Leasehold and Freehold Reform Bill has been met with resistance in its journey through Parliament.
Some opponents of the bill argue that it does not do enough to support the rights of leaseholders in its current state. For example, the lack of attention towards the arduousness of the tribunal system that oversees pay disputes between leaseholders and freeholders has been highlighted as a glaring oversight within the bill’s terms. The fact that the bill does not seem to cover flats despite 63% of London flats being owned on a leasehold basis is another criticism levelled against it from a leaseholder’s perspective.
Others have claimed that the bill, alongside similar proposed housing market reforms, is inherently “contentious” and “destabilising” due to a lack of consideration for vested property interests and a lack of willingness by the government to compensate freeholders in the event of a ground rent cap. This has given certain parties the grounds to legally challenge the bill due to its threat to pension funds.
So far, Housing Secretary Michael Gove has had to reconsider the terms of the reform bill to appease the likes of Chancellor Jeremy Hunt and Prime Minister Rishi Sunak. Any hope that the bill may have introduced for reinvigorating the presence of more mutually beneficial commonhold tenures within the housing market has also been stalled by opposition, with the established leasehold model being largely to blame for stunting their spread.
Overall, the current progress and likelihood of the Leasehold and Freehold Reform Bill is up in the air. The upcoming General Election could lead to a last-minute, politically savvy push towards its being passed, but how many of its terms will survive the challenges of backbenchers and lobbyists is anyone’s guess.
Our Stance on Leasehold Reform
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