Radical plans to end huge costs of buying a freehold unveiled
Law Commission draws up options enabling leaseholders to extend or buy more cheaply
by Patrick Collinson
The Guardian, 19/07/2018
Millions of homeowners caught in the so-called “leasehold trap” may be able to buy their freeholds at a fraction of the price currently demanded by ground rent companies, under radical proposals from the Law Commission.
One proposal is for a simple formula where leaseholders will pay just 10 times their current ground rent to convert their property from leasehold to freehold.
There are 4.2m leasehold properties in England, and around half are on leases of under 80 years, leaving residents vulnerable to what critics say are rapacious demands from freeholders for lease extensions.
The Law Commission was asked by then communities secretary Savid Javid in December 2017 to find ways to make buying out a lease “much easier, faster and cheaper”. In its response, the Law Commission, an independent legal body, on Thursday sets out two options for reform. The first is a formula that “could be based on ten times the ground rent” or “10% of the value of the property”, saying that any new rules must reduce the current cost for leaseholders. It added that a simple formula had the benefit of being easily understood and would reduce legal costs.
With ground rents averaging around £370 a year, that suggests a cost of £3,700 – far less than the £10,000 to £40,000 typically sought from a leaseholder for a flat valued at £200,000 with fewer than 80 years left on the lease.
Its second option is to standardise the existing regime for leasehold valuations, removing a complicated element called “marriage value” that it said currently increases the cost paid by leaseholders.
The Law Commission also proposed new formulas for leaseholders who extend their lease rather than buying the freehold. It suggested that they could have a right to extend the lease for up to 250 years, and no longer have to pay ground rents.
The Law Commission said proposals were only at an outline stage, and that a full consultation document would not be published until the autumn, with new rules unlikely until summer 2019. Any changes to the calculation of leasehold extensions is likely to meet fierce resistance from freeholders, with the fortunes of Britain’s wealthiest aristocrats, such as the Duke of Westminster, rooted in lucrative leasehold property estates in central London.
A legal challenge to existing leasehold valuations – which estimated that leaseholders were overpaying by hundreds of millions of pounds every year – was rejected by the Court of Appeal earlier this year.
The Law Commission said it would have to ensure that “sufficient compensation” was paid to landlords. “Any changes to the law that government takes forward will have to comply with human rights legislation and take account of the impact of reform.
“And while some changes – in particular the options that we have been asked to present to reduce the premium payable by leaseholders – will inevitably benefit leaseholders at the expense of landlords, that is not the case across the board.”
Campaigners for leasehold reform, who demonstrated outside parliament on Wednesday, welcomed the proposals. Sebastian O’Kelly of the Leasehold Knowledge Partnership said: “Lease extension and enfranchisement – the buying of the freehold – are two highly lucrative rackets.
“The mathematical formulae agreed by the courts were obligingly provided by estate agents for the richest freehold owners in the country. The only way to end this racket is a fixed formula of annual multiples of ground rent, as exists in Northern Ireland and Scotland, then your home is truly yours.”
Around one in five new-build houses in recent years – and almost every flat – have been sold as leasehold, some with spiralling ground rents that have made selling them near impossible.