The Overhaul of Property Law: Understanding the Leasehold System

The Overhaul of Property Law: A New Dawn for Homeowners in the Leasehold System

A seismic shift is underway in the landscape of property ownership, particularly for millions of homeowners ensnared in the complexities of the leasehold system. Long a cornerstone of property law, especially in England and Wales, the leasehold model is undergoing a significant overhaul, promising a future with greater security, transparency, and fairness for leaseholders. This deep dive will explore the intricacies of the leasehold system, its historical baggage, the problems it has created, and the transformative changes being ushered in by landmark legislation.

Understanding the Leasehold System: A Tale of Two Ownerships

At its core, property ownership in many parts of the world, and most notably in the UK, is divided into two primary forms: freehold and leasehold.

Freehold ownership is the most complete form of property ownership. When you own a property freehold, you own both the building and the land it stands on indefinitely. You are responsible for its maintenance and have the freedom to make changes to your property, subject to planning permissions. Leasehold ownership, on the other hand, is a more temporary arrangement. When you purchase a leasehold property, you are essentially buying the right to occupy the property for a fixed period, as stipulated in the lease agreement. This period can range from a few decades to as long as 999 years. However, you do not own the land the property is built on; that remains the property of the freeholder, who is effectively your landlord. At the end of the lease term, ownership of the property legally reverts to the freeholder.

This system is particularly common for flats and apartments, as it provides a legal framework for managing shared spaces and responsibilities within a single building. However, the sale of new houses as leasehold has also been a contentious practice.

A System Rooted in Feudalism: The Historical Context

The origins of the leasehold system can be traced back to the feudal arrangements of medieval England. In this hierarchical society, land was the primary source of wealth and power, with the monarch at the top, granting land to lords who, in turn, would lease it to tenants in exchange for services or rent. This system of land tenure, where ownership and occupation were separated, laid the groundwork for the modern leasehold system.

The Industrial Revolution and the subsequent urbanization of the 19th and 20th centuries saw a boom in leasehold properties, particularly in cities where land was scarce and valuable. Developers found it profitable to build and sell properties on long leases while retaining ownership of the land, thus securing a long-term income stream. The 1950s and 1960s saw a surge in the construction of blocks of flats, further entrenching the leasehold model as the primary way to manage multi-occupancy buildings.

The Cracks in the System: Problems Plaguing Leaseholders

For many, the dream of homeownership has been tainted by the often-onerous terms and conditions of leasehold agreements. The system has been criticized for creating an imbalanced power dynamic between freeholders and leaseholders, leading to a host of problems:

Escalating Ground Rents: One of the most contentious issues has been the practice of charging ground rent, a payment made by the leaseholder to the freeholder. While traditionally a nominal sum, in recent years, some developers and freeholders have imposed aggressive ground rent clauses that double every few years, leading to exorbitant and unaffordable costs for homeowners. This has, in some cases, rendered properties unsellable and unmortgageable.
High Service Charges: Leaseholders are typically required to pay service charges to the freeholder for the maintenance and upkeep of the building's common areas, such as hallways, roofs, and gardens. However, a lack of transparency and regulation has led to complaints of excessive and opaque service charges, with leaseholders having little control over the costs they are forced to bear.
A Wasting Asset: Unlike freehold property, a leasehold property is a depreciating asset. As the lease term shortens, the value of the property decreases. This becomes a significant problem when the lease falls below 80 years, as it can be difficult to secure a mortgage or sell the property.
The Cost of Consent: Leases often contain restrictive covenants that require leaseholders to obtain the freeholder's consent for any alterations to the property, from minor changes to major renovations. This process can be both costly and time-consuming.
Difficulty in Buying the Freehold or Extending the Lease: While leaseholders have the legal right to extend their lease or collectively buy the freehold (a process known as enfranchisement), the process has historically been complex, expensive, and fraught with legal hurdles.

These issues have culminated in a growing crisis, with many leaseholders feeling trapped in their own homes, facing financial hardship and emotional distress.

The Winds of Change: The Leasehold and Freehold Reform Act 2024

In response to the mounting public outcry and numerous campaigns for reform, the UK government has introduced the Leasehold and Freehold Reform Act 2024. This landmark piece of legislation aims to rebalance the scales and create a fairer, more transparent, and more secure property market for leaseholders. The Act, which received Royal Assent on May 24, 2024, introduces a raft of significant changes.

Here are some of the key provisions of the Act:

Making it Cheaper and Easier to Extend a Lease or Buy the Freehold: The Act aims to simplify the process of enfranchisement and lease extensions, making it more affordable for leaseholders. A key change is the removal of "marriage value" from the calculation of the premium for a lease extension. Marriage value is the increase in the property's value once the lease has been extended, and previously, a share of this had to be paid to the freeholder.
Standard Lease Extension of 990 Years: The standard lease extension term for both houses and flats will be increased to 990 years, up from the previous 50 years for houses and 90 years for flats. This will provide greater long-term security for homeowners.
Abolition of the Two-Year Ownership Rule: Previously, leaseholders had to own their property for two years before they could extend their lease or buy the freehold. This requirement has been abolished, effective from January 31, 2025, allowing new owners to initiate the process immediately upon purchase.
Greater Transparency on Service Charges: The Act will require freeholders and managing agents to issue service charge bills in a standardized format that is easier for leaseholders to scrutinize and challenge.
Increased Rights for Leaseholders in Mixed-Use Buildings: The threshold for leaseholders in mixed-use buildings (those with both residential and commercial units) to buy their freehold or take over management has been increased from 25% to 50% commercial space, giving more homeowners the opportunity to take control of their building.
Banning the Sale of New Leasehold Houses: In a significant move, the Act bans the sale of new leasehold houses, except in exceptional circumstances.

The Timeline for Reform: When Will the Changes Take Effect?

While the Leasehold and Freehold Reform Act 2024 is now law, the full implementation of its provisions will be staggered. Secondary legislation and further consultations are required to bring all the changes into force.

Here is a projected timeline for the key reforms:

January 2025: The abolition of the two-year ownership rule for lease extensions and freehold purchases came into effect.
Spring 2025: Changes to the Right to Manage provisions are expected to come into force, allowing more leaseholders in mixed-use buildings to take over the management of their properties.
Summer 2025: The government is expected to consult on the valuation rates used to calculate the cost of enfranchisement premiums.
Second half of 2025: A new Leasehold and Commonhold Reform Bill is anticipated, which will aim to make commonhold the default tenure for new flats.

A New Horizon: Commonhold as an Alternative

The conversation around leasehold reform has also brought another form of property ownership into the spotlight: commonhold. Introduced in 2002, commonhold is an alternative to leasehold that allows individuals to own the freehold of their flat or unit within a larger building or estate. The common parts of the building are owned and managed jointly by all the unit-holders through a commonhold association.

The key advantages of commonhold include:

Perpetual Ownership: Unlike leasehold, there is no time limit on ownership.
No Ground Rent: There is no obligation to pay ground rent.
Greater Control: Unit-holders have a direct say in the management of their building.
No Threat of Forfeiture: The risk of losing your home for minor breaches of the lease is eliminated.

Despite its apparent benefits, the uptake of commonhold has been very low, partly due to the entrenched nature of the leasehold system and the financial incentives it offers to developers. However, the government has expressed its commitment to reinvigorating commonhold and making it the default tenure for new flats in the future. A White Paper on commonhold reform was published in March 2025, outlining the government's plans.

Navigating the Changes: Practical Implications for Homeowners

The overhaul of the leasehold system has significant practical implications for both current and prospective homeowners.

For existing leaseholders:

The changes to the lease extension process could make it significantly cheaper and easier to increase the length of your lease, adding value and security to your property.
The increased transparency in service charges will empower you to challenge unreasonable costs.
The prospect of converting to commonhold offers a potential route to escaping the limitations of the leasehold system altogether.

For those looking to buy a leasehold property:

The abolition of the two-year ownership rule provides greater flexibility, allowing you to address a short lease immediately after purchase.
It is still crucial to scrutinize the length of the lease and understand the associated costs, such as ground rent (for existing leases) and service charges.
Be aware of the ongoing reforms and how they might impact the property you are considering.

The Road Ahead: A More Equitable Future?

The overhaul of the leasehold system is a complex and ongoing process. While the Leasehold and Freehold Reform Act 2024 represents a major step forward, the full impact of these changes will only become clear as they are implemented and tested. There are still challenges to overcome, including potential legal challenges from freeholders and the practicalities of transitioning to a more widespread commonhold system.

However, the direction of travel is clear. The reforms signal a fundamental shift in the balance of power, moving away from a system that has often been seen as exploitative and towards a future where homeownership is more secure, transparent, and fair for all. For the millions of people living in leasehold properties, this overhaul offers a beacon of hope and the promise of a new dawn.