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UK Real Estate Insights
Despite previous pledges to abolish residential leaseholds in England and Wales by the end of this year, a clash between Michael Gove and Downing Street has caused the housing secretary to fall short of his promise. The focus will instead be on introducing new measures which aim to protect existing residential leaseholders under the current system.
Mr Gove has been very open on his view that the English property leasehold system is a “feudal” system which is both “unfair” and “outdated”. However, as first reported by the Guardian, his intention to scrap the system entirely and replace it with a new form of common ownership will not happen this year. Instead, the government plans to introduce new laws to further protect leaseholders under the current system and provide them with greater powers to challenge their landlords.
One of the new measures expected to be unveiled is a cap on ground rent, limiting the amount freeholders can charge their existing leaseholders to roughly 0.1 per cent of the property’s value.
A ground rent is often payable by property owners who own the lease of their property but not the land it is built on (otherwise called leaseholders). While leaseholders have a right to use their property, they are still required to comply with provisions of a lease agreed with the owner of the land (otherwise called a freeholder). Such provisions may include paying an additional rent to the freeholder on top of any mortgage payments and utilities bills. This additional rent is called a ground rent.
Ground rents have been an increasingly popular income stream for those who own or invest in UK property and can commonly be anything from £100 to £2,000 a year. For this reason, they are being met with growing criticism from tenants who are facing high and unexpected charges for properties they already occupy without the power to seek redress.
This criticism also rings true for other leasehold mechanisms such as service charge and building insurance commissions. Service charge has come under particular scrutiny following developments in the building safety act since the Grenfell Tower fire and new measures are expected to be introduced restricting the ability of a freeholder to charge through such mechanisms.
With around 20 per cent of homes in England still being leasehold properties, these measures will have a significant impact on the UK property market and build on last year’s government reforms which abolished ground rents for certain new residential leases granted after June 2022. Please see our earlier article for more information.
It may not be the drastic reform originally planned by Gove, however the government is clearly making leaseholds a far less attractive option and laying the groundwork to move towards a reformed commonhold system. The Department for Levelling Up, Housing and Communities (the “DLUHC”) have reconfirmed that they are “determined to better protect and empower leaseholders to challenge unreasonable costs” and that they will “bring forward further leasehold reforms later in this parliament.”
While it is undoubtedly important to question the suitability of our current leasehold system in modern society, especially as the UK is one of the few countries where it remains, it is a long-established system which cannot simply be replaced overnight. We await further details of these new measures led by the DLUHC and the reform agenda to be announced in the King’s speech later this year.