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Leasehold reform: Past, present & future

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“What is the point of leasehold properties?”

When I began my career in Leasehold Reform, it was difficult to see any reason for a leasehold property aside from helping a Landlord to profit. To this day, I hear many lessees ask the same as we begin a new extension. This article details the history of leases and some recent progress on leasehold properties.

Over the last year, there have been some political advances on Leasehold properties which may potentially have significant implications going forward. Most notably, leaseholds on new build homes have been abolished.

 

Leaseholds Past

Speaking of beginnings, what is not common knowledge is the birth of Leasehold, which was in medieval times. A Leasehold ownership is a temporary right to hold land or property. During the medieval era, owning land was the principle of social order where it was the primary asset to give social status.

During the Middle Ages, Lords owned vast amounts of land, hence the term “Land- Lords”, and it was near impossible for hard-working families to own property. As the land equated to power in these times, the most powerful families wanted to retain ownership of their land while producing an income.

It was for this reason that the concept of Leasehold was born - with working-class families able to live and work on parts of the land for a fixed amount of time while repaying the owner through services. From this, we have the term “peppercorn ground rent”, as this was a minimal payment from a tenant who was leasing land.

 The modern system of Leasehold originates from the late 1800s. Landlords began renting out land for fixed periods, typically 99 (now usually 125 years) and received a sum while retaining land ownership. This further benefitted the landowners as they didn’t want to take on any risk, so they passed it on to builders who would construct the estates on their land and let or sold the finished property, paying the landowner a ground rent.

From the 1950’s, large volumes of flats were being built around the UK, and since freehold properties require horizontal division or separate boundaries, they could only be classed as leasehold. As a result, the population of leasehold property rose significantly. At this time, a tenant enjoyed few rights, particularly protection against losing the property at the end of their lease term. Over time, legislation has been introduced to provide tenants with greatly improved rights, and when the 1993 Act was introduced, it was heavily opposed. The rumour says that it was pushed through due to certain people in power wanting to extend leases on their properties at the time.

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Leaseholds Present

In the last 5-10 years, we have seen various decisions bearing in the cost to those rights still favouring Landlords establishing that short lease sales evidence where available, is preferred to traditional graphs, most recently confirmed in the Mundy case which has increased premiums.

In the media, we have also seen numerous cases involving onerous ground rents. The combination of these has led to increased awareness and the perils of leaseholds being spoken about in parliament. In particular, included within a White Paper, there was a broad range of reforms that the government plans to introduce to help reform the housing market and boost the supply of new homes. There may be just as much criticism to any Leasehold Reform Act changes from Landlord investors as we have seen from lessees, but it seems as though its days are numbered.

Scotland has already made strides by abolishing the majority of leasehold property, forming instead a “Feuhold” ownership or “Commonhold” as it is more frequently known. The Long Leases (Scotland) Act 2012 was introduced to convert leasehold interests into freehold-like ownership, removing the leasehold element. This process is a lot easier in Scotland due to the Feudal system being done away with in 2004. Additionally, they benefit from the allowance of horizontal division of property, unlike in England and Wales where a lease structure would be required. As of 28 November 2015, long leases automatically converted into freehold-like arrangements, albeit there are certain qualifying terms. Owners of shorter leases would still have to compensate the freeholders. Today there are very few flats owned as leasehold interests in Scotland.

 

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Leaseholds Future Prediction

My view is that active law similar to The Long Leases (Scotland) Act 2012 may be implemented in England

and Wales in the future, but this is a long way away. There are too many investment Landlords and freehold ground rents already established which would be hugely affected if the current leasehold system disappeared.

In our February 2018 auction, there was a larger proportion of freehold ground rent investments than usual, all of which sold with mixed results – some selling for more than double the guide and others at a little over the guide. Likewise, if any formula were imposed to regimentally extend leases, then there would also be significant upheaval.

The Leasehold Reform Housing and Urban Development Act 1993 did establish Commonhold. However, it has yet to be implemented into active law in England and Wales. It is something that will most likely happen over time and with an increase in new developments and regulation leasehold properties become limited and a thing of the past.

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If you have any questions or would like more information, please contact a member of our Leasehold Reform Team.