Leasehold reform: Realign the wheel, don't reinvent it

Linda Kirk, Head of Residential Conveyancing, Adkirk Law, explains how, despite widespread criticism, backtracking on overhauling the leasehold system is actually a smart move from the government.

Related topics:  Landlords,  Property,  Law,  leasehold
Linda Kirk | Adkirk Law
8th September 2023
Linda Kirk 565
"Interested parties and campaigners who have criticised the government for rolling back on the overhaul of the leasehold system are perhaps missing the point; there is no sense in throwing the baby out with the bathwater."

The government has come under fire in recent times for its U-turn on plans to overhaul the leasehold system, with critics branding the system 'feudalistic' and calling for a new system to take its place altogether. However, it could be argued that to have promised to entirely scrap the leasehold system was, in the first place, short-sighted and unwise.

What many seem to have forgotten is that the leasehold system used to, for the most part, serve homeowners well. The core issue with the leasehold system is that it is simply outdated and is in need of reform.

Moreover, Recent research from the Department for Levelling up Housing and Communities (DLUHC) suggests that the population still largely prefers the leasehold model over alternatives, such as commonhold or owning the freehold, as they would far rather avoid taking on the responsibility of building maintenance and the wider legal and financial liabilities attached to buying the freehold for a property, which is surprising.

Perhaps, then, a more piecemeal approach to resolving some of the issues, as the government has now suggested taking, is actually more sage policy making.

Nonetheless, there is no doubt that there are issues with the leasehold system, chiefly doubling ground rents and rent review provisions. Currently, the system is slowing down the property market, and these costly problems with leaseholds, when combined with the Building Safety Act, are making owning a leasehold something of a poisoned chalice.

There are some relatively simple steps that the government could take to address these, without the need to overhaul the system altogether. Unfortunately, the government has a history of solving one problem and in doing so succeeds in creating a new one, for example, the use of rent charges to enable service charges to be collected on freehold properties. To break out of this cycle, a more strategic and fine-tuned approach needs to be adopted moving forward.

Firstly, legislation to cap ground rents on all existing leases should be introduced, with new leases also paying peppercorn rents. Many of the issues with the current leasehold system can be traced back to the widespread inclusion of doubling ground rents, which has made owning a leasehold prohibitively expensive.

Secondly, a clause should be added to legislation to either abolish the rent issue created by the Housing Act 1988 or to say that the relevant clause is applicable across all leases, whether it is formally included or not. This provision would be similar to the abolition of forfeiture in the event of bankruptcy, which was highly effective.

The government should also limit the amount that can be charged for notice fees and other administrative charges. Many companies are charging extortionate fees for providing LPE1 forms, receiving notice of assignments, issuing share certificates, and deeds of covenants when not appropriate. Buyers are unaware of these extortionate costs and have often not budgeted for them.

These solutions are relatively minor fixes to introduce, but they would have a major impact on amending the problems that exist with the leasehold system. They would be unlikely to turn leaseholds into a perfect model, but a perfect solution doesn't truly exist, despite some campaigners suggesting it does in the form of the commonhold system.

However, introducing a commonhold system would likely be disastrous. Lenders don't like them, and replacing leasehold with commonhold would almost certainly cause issues with unqualified or uninformed parties handling the management of blocks of flats, ultimately leading to delays in getting LPE1 forms, a situation we have already seen with Right to Manage management companies.

Commonholds did not work the first time that the government tried to introduce them, with just 20 formed between 2004 and 2019. Overall, a commonhold system would simply lead to flat owners paying a management company as an agent, which fails to remove the overheads attached to service charges; it only replaces them.

A further constructive step the government could take would be to remove the restrictions that prevent conveyancing solicitors from providing certificates to the land registry confirming the relevant lease clauses have been complied with. Alternatively (and perhaps preferably), the government could simply abolish the requirement for certificates of compliance entirely.

After all, these are little more than a shakedown of leaseholders, given that by taking on a lease, by law you are also taking on the covenants. As part of the conveyancing process, conveyancers always check that the ground rents and service charges have been paid up to date and apportionments have been made as a matter of course.

Standardised leases, in the same way as standardised shared ownership leases were introduced, would also be a positive step in the right direction, as this would eliminate the need for future amendments to leases.

Interested parties and campaigners who have criticised the government for rolling back on the overhaul of the leasehold system are perhaps missing the point; there is no sense in throwing the baby out with the bathwater, and with some small but precise adjustments, the leasehold system could be largely fixed. These simple yet effective changes could make a significant difference to the speed, efficiency, and volume of property transactions, and without creating any new problems.

Moreover, the benefits to the economy if the buying and selling process were sped up would likely outweigh any losses made by the freeholders and management companies. Overall, we're better off fixing what we have than throwing the market into turmoil by trying to reinvent the wheel.

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