Plans to cap ground rent, end the sale of new leasehold flats and make it easier for existing leaseholders to move to commonhold form part of what the government has described as a ‘game-changing’ shake-up of the leasehold system.
These changes build upon efforts to implement the Leasehold and Freehold Reform Act 2024.
Here, Which? spotlights the key elements of the announcement, why it could benefit the entire property market, and when leaseholders will actually see changes come into effect.
Ground rent to be capped at £250
The government has announced plans to cap ground rents – the fee paid by a leaseholder to the freeholder – at £250 a year. After 40 years, this will then change to a peppercorn cap, which effectively means that very little or no ground rent will be paid.
Leasehold properties will not be fully outlawed as part of the proposed legislation, but new leasehold flats will be banned.
The changes have been announced as part of publishing the draft Commonhold and Leasehold Reform Bill, which the government says will ‘fundamentally rewire homeownership across England and Wales’.
Leaseholder Action, a group representing leaseholders involved in legal action over concerns about practices in the leasehold sector, welcomed the announcement but said some would be disappointed that ground rents aren’t being eliminated immediately.
Liam Spender, the lawyer behind the Leaseholder Action claim, points out that ‘the cap will make it cheaper for people to buy the freehold and to extend their leases, both of which are priced by reference to ground rent values.’
The Bill would also abolish forfeiture and replace it with a new enforcement regime. At present, leaseholders can ultimately lose their home and the equity they have built up if they default on a debt as low as £350.
It would also introduce a new process to make it easier for leaseholders to move to commonhold. Under a revamped commonhold model, homeowners would have more control over how their building is managed and the bills they pay.
- Find out more: Leasehold vs freehold
What is commonhold?
Commonhold was first introduced in England in 2002.
With commonhold, each homeowner within a building owns the freehold to their own property.
The ‘common’ parts of the building are owned and managed by a commonhold association, made up of homeowners in the building rather than a third-party management company.
This gives homeowners the ability to control how the building is managed, including the costs of upkeep.
When will the changes come into effect?
Leaseholders may welcome the prospect of lower costs through reduced ground rent, but the reforms are still some way off.
The proposals form part of the Commonhold and Leasehold Reform Bill, which will now move to pre-legislative scrutiny. This means it could be several years before it receives Royal Assent and becomes law.
Currently, the government estimates that the ground rent cap could come into force in late 2028, but that is subject to Parliamentary timings.
Why this could help borrowers
Mortgage lenders will sometimes carry out additional checks or refuse to lend on leasehold properties with high ground rent, as extortionate fees significantly impact the properties’ value.
The government hopes that the introduction of a cap on ground rent will make it easier for potential borrowers to apply for a mortgage on leasehold properties. It will also possibly make it easier for owners of leasehold properties to sell them.
This could potentially benefit the entire property market by reducing the number of chains that collapse because of issues surrounding ground rent.
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New measures to support leaseholders
Successive governments have promised reforms to the leasehold system. Notably, legislation to ban new-build houses being sold as leasehold became law in 2019.
In the final days of the Conservative government, the Leasehold and Freehold Reform Act 2024 was passed. Key provisions of the legislation included:
- Making it easier and cheaper for leaseholders to buy their freehold.
- Extending standard lease terms to 990 years.
- Increasing transparency on service charges and requiring freeholders and managing agents to issue standardised bills.
- Simplifying the process for challenging unreasonable charges at a tribunal.
- Making it easier and cheaper for leaseholders to take over the management of their building.
However, only some of these measures are currently in force. Others rely on secondary legislation and are expected to take longer to come into effect.