Leasehold houses are given eviction notice

Leasehold housing has been served an eviction notice by the government.

This morning the communities department published a consultation that would, among other things, abolish leasehold tenure for all but a few new-build houses and dramatically reduce rental fees charged to all new leaseholders.

Earlier this year, the then-majority Conservative administration made noises that it wanted to amend legislation in order to offer greater protection to leasehold homebuyers.

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A "commitment to crack down on unfair practices in leasehold" was then included in the Conservatives' manifesto ahead of the June general election. It appears to have survived the policy cull that accompanied the party's deal with the Democratic Unionist Party.

Freeholds vs leaseholds

Before explaining the new policy, it's worth clarifying what a leasehold is and how it relates to its opposite number, a freehold.

Most houses in the UK are sold as freeholds, which means that the buyer is purchasing both the home itself and the land it stands on outright in perpetuity, according to the Homeowners Alliance.

In practice this means the house and land are yours to do with as you see fit, provided you comply with planning laws and do not breach any covenants or restrictions that are legally imposed for conservation reasons.

The other way you can own your home is as a leaseholder, which means you have bought from the freeholder the right to use the property for a set number of years.

Generally, communal areas and the main structure of the property are the responsibility of the freeholder but are paid for jointly by leaseholders through service charges and ground rents. If you own your property evia a lease you are probably required to pay fees to make changes to your home.

Terms and conditions of leases vary and are difficult to change.

In principle, leaseholds are reserved for flats and other private ownership arrangements where there are communal areas to be maintained. Most standalone houses are freehold.

All this is changing, though. Official figures now show that there are 1.2 million leasehold houses in the UK and the use of this form of ownership is "rapidly growing".

According to the government, this is especially true of the north-west of England. In areas like Cheshire, Greater Manchester and Merseyside, leasehold has in some cases become the "default tenure".

'Enough is enough'

So what's gone wrong with leaseholds?

Earlier this year a scandal broke out about ground rents. This related to clauses in new-build home contracts that in some cases doubled the rates of rent every ten years.

In cases cited by the government, homeowners' ground rents on £200,000 houses started at £295 but were set to rise to £10,000 by 2060, thereby bumping up the statutory value of the freehold to £35,000.

Justin Madders, a Labour MP and member of the all-party parliamentary group on leasehold reform, has referred to these contracts as "the PPI of the house building industry", says the Financial Times. [3a]

Leaseholders complain that they are charged very high fees to have work done on their homes. They also say that their freeholds are sold on to investment companies which then ramp up charges to buy the freehold – a process known as "enfranchisement".

This makes it very difficult for homeowners to sell their property on or remortgage. Mortgage lenders don't like to take on properties with less than 70 or 80 years left on the lease because of resale implications, says the Money Advice Service.

Announcing the consultation today, Communities Secretary Sajid Javid said: "Enough is enough. These practices are unjust, unnecessary and need to stop."

Some lenders, such as Nationwide, already refuse to offer loans for new-build leasehold houses or flats with "punitive clauses" on ground rent or shorter leases, says the Daily Telegraph.

The new proposals

Under the proposals, unless a newly-built home meets specific criteria (such as being on National Trust land, being part of a residential nursing complex, in a conservation area, or in a shared ownership arrangement) it will not be able to be sold as a leasehold.

Where someone does buy a lease on a qualifying house or flat, there will also be restrictions on ground rates that could include limiting them to "peppercorn" levels in line with "real costs incurred".

Protections will be put in place to stop homeowners being inadvertently caught out by laws for renters and thereby vulnerable to forced eviction by freeholders for not paying ground rents.

The Housing Act 1988 classifies anyone paying more than £1,000 in London, or £250 elsewhere, with a "long lease" of more than 21 years as being in an "assured tenancy".

The government says it's open to ideas on how to establish a fairer regime. The consultation will run for eight weeks.

It's worth noting the new rules would only apply to England initially, as housing is a matter for devolved administrations. So in Wales, where the same laws apply, the Welsh government would have to bring forward legislation to replicate any beneficial changes made.

In Scotland the law is completely different and there are very few leasehold properties.

The remnants of the feudal system made it unnecessary for historic landowners. But laws passed since 2004 have handed owners more rights. These include the right to make changes to multi-occupancy buildings by majority vote.

So what's next?

The government says these proposed reforms are the first in a series to improve the housing market, following on from a recent white paper.

One area it specifically picks out is "commonhold", a third form of property tenure than has only been used "15 to 20 times" since being introduced in the Leasehold Reform Act of 2002, says the Homeowners Alliance.

A commonhold is a way of combining the benefits of a leasehold and a freehold. It works a bit like a mutual company.

The communal areas are owned by a commonhold association that's in turn owned in shares by the individual homeowners, rather than by a "superior freeholder".

But an organisation owned by a group of individuals jointly is always susceptible to paralysis. Perhaps that's why the idea has failed to catch on, not least among developers. Reforms similar to those applied in Scotland could be used to make the option more workable.