Leasehold reform and commonhold

Following various consultations and reports, on 7 January 2021 the government announced that in relation to properties in England it intends to:

• introduce a right for leaseholders of both houses and flats to extend the lease of their property by 990 years at zero ground rent;
• reform the basis on which the premiums payable to buy the freehold or extend a lease are calculated; and
• no longer exempt retirement properties from the proposal to restrict ground rents in new leases to zero.

Other than in relation to the lack of exemption for retirement properties, there is little that is new in the announcement, with minimal detail being provided by government.

The announcement took the retirement living sector by surprise. New retirement properties will now see ground rents restricted to zero despite previous indications that this sector would be exempted from the policy. However, the government notes that '[i]n recognition of the previous announcement of the ground rent exemption for retirement properties in June 2019, and wishing to mitigate potential impact on these developers, commencement of this provision will be deferred and come into force (for retirement properties) 12 months after Royal Assent'. This will not help operators who have used ground rents (instead of, or in addition to, event fees) in their financial models for new sites. We expect there to be significant lobbying in response to what now seems to be a pincer movement attacking both ground rents and event fees, with the potential unintended consequence of pushing up both the day one price for consumers and management fees. Retirement living is often regarded as a costlier and riskier than other real estate sectors, and if government legislation reduces returns for the private sector, the market will respond.

In relation to valuations, the government announced that marriage value (which can be a significant additional cost to a tenant where their lease has 80 years or less to run) is to be removed from the premium calculation. The government will now 'set the calculation rates to ensure this is fairer, cheaper and more transparent'. 

An online calculator will be introduced to make it easier for tenants to find out how much it will cost them to buy their freehold or extend their lease. In a written statement the Secretary of State for Housing, Communities and Local Government also said that, where leaseholders already have a long lease, they will be given the option to buy out the ground rent without the need to extend the term of the lease.

The government also announced that it is establishing a Commonhold Council. This will be a partnership of 'leasehold groups, industry and government' and it will 'prepare homeowners and the market for the widespread take-up of commonhold'. The Secretary of State has said that work will start immediately on this, including considering legislation. We believe there are fewer than ten properties in England and Wales that are commonhold despite commonhold legislation having been introduced almost 20 years ago. There are 25 million homes in England and roughly 150,000 new homes are built per annum, i.e. 0.6% of the total market. Take up of commonhold will be a slow revolution, if it happens!

The government states that legislation will be brought forward to set future ground rents to zero in the upcoming session of parliament and the remaining proposals will be brought forward in due course. The written statement also notes that the government will respond in due course to the Law Commission's remaining recommendations on enfranchisement, commonhold and right to manage.