All this activity in parliament has been prompted by a number of well publicised scandals involving property buyers, often relatively unsophisticated first-time buyers of new-builds, who found themselves buying leasehold rather than freehold with onerous provisions in their leases. 

Some of the leases deemed to have had oppressive provisions included those with ground rents that doubled every ten years or so or increased in line with an inflation index. Freeholders could demand large payments for approving alterations or extensions. Leaseholders might have to insure the property through the freeholder’s agency and pay various fees and charges when the leasehold property was sold. 

Buyers saddled with these unfair leases found that they were difficult to sell and mortgage lenders with loans secured on these leases found that their security was impaired. 

The first part of this legislative process is the Leasehold Reform (Ground Rent) Bill which will put to an end ground rents for all new qualifying long residential leases in England and Wales. At the time of writing this bill is currently being scrutinised in the House of Lords and is expected to be referred back to the Commons for final approval fairly soon. 

The Ministry for Housing, Communities and Local Government (MHCLG) estimates that the proportion of new build houses which were leasehold increased from about 7% in 1995 to 15% in 2016 however the latest reports suggest that this is now down to about 1% so the house builders have already got the message that leasehold new-builds are no longer likely to be profitable. In most situations there is no logical reason why a house should be sold leasehold and buyers should always insist on freehold ownership. 

Passing legislation to deal with new leasehold contracts is probably the easiest part of this process although not without contention. For example freeholders of blocks of flats will argue that without any ground rent income they will have little incentive to incur the very significant costs and hassle involved in collecting service charges and managing the building. 

The second part of the process will include further legislation to improve the position of existing leaseholders many of whom are saddled with onerous leases. MHCLG data indicates that there are about 4.6 million leasehold properties in England 68% of which are flats and 32% houses. Flats in England are almost always sold on a leasehold basis (although the owner can also own a share of the freehold) because a leasehold contract is necessary under English Law to ensure that covenants between occupants in the block can be enforced. 

The situation in Scotland is quite different. Flats in Scotland are sold on the Scottish equivalent of freehold and Scottish Law provides for the mutual enforcement of covenants. 

MHCLG  information indicates that only about 8% of houses in England are leasehold with the overwhelming majority sold on a freehold basis however the proportion of leaseholds is much higher in the North West at around 28%. Many of the complaints about unfair leases on new housing estates have come from the North West so this has been very much a regional issue with local MPs being pressurised by their aggrieved constituents to do something about it. 

Surveyors undertaking valuations of leasehold properties for mortgage lenders will be very familiar with all these issues and how they impact on valuations. A leasehold property is a depreciating asset and its value reduces to nothing at the end of the lease when ownership reverts to the freeholder. This depreciation may be masked for a while by general property price inflation but once the lease has less than 80 years left to run the effect on mortgageability is significant. 

Leaseholders faced with a reducing lease term then have to purchase a lease extension from the freeholder and at this point the freeholder may seek a substantial premium and uplift in the ground rent. Because the freeholder has the upper hand in these situations – especially if the leaseholder is trying to sell the property – parliament has intervened in a process which began with the Leasehold Reform Act 1967 and which now continues with the second stage of the current process. 

The proposals for stage two of the current process are that leaseholders should be able to extend their leases to 900 years effectively ruling out any need for lease extensions in the future with ground rents fixed at a peppercorn and with the price for the lease extension determined by some yet to be confirmed formula. Action will also be taken to deal with other unfair lease terms. 

Peter Glover is a surveyor and author of Building Surveys and Buying a House or Flat