Leasehold and Freehold Reform Bill: government set to U-turn on Michael Gove's landmark legislation

The government is reportedly set to U-turn on its pledge to effectively abolish ground rents for leaseholders.

Last year, Housing Secretary Michael Gove introduced the Leasehold and Freehold Reform Bill to Parliament to revolutionise the leasehold sector and make it easier for homeowners to buy their freehold.

The law - which will affect millions of property owners across England and Wales - will also increase standard lease extension terms to 990 years, and provide greater transparency over service charges. Housing campaigners have for decades called for reform of the "feudal" leasehold system, which allows a separate freeholder to own the land a flat or house sits on.

Currently freeholders can levy eye-watering maintenance and service charges in blocks of flats, and if homeowners want to extend their lease term it can be a complicated and expensive process. NationalWorld previously reported how a woman trapped in flat with same fire-risk cladding as Grenfell Tower was forced to pay up to £30,000 for its removal.

The new law will make all new houses in England and Wales freehold, other than in exceptional circumstances. Gove said the bill will address the historic imbalances between leaseholder and freeholder to give homeowners a fairer deal.

Bringing the bill to Parliament, he said: "People work hard to own a home. But for far too long too many have been denied the full benefits of ownership through the unfair and outdated leasehold system. That’s why liberating leaseholders forms a vital part of the government’s long-term plan for housing. So today marks a landmark moment for millions of leaseholders across the country, as we unveil laws to deliver significant new rights and protections, slash unfair costs and crack down on exploitation."

While Sebastian O'Kelly, director of the Leasehold Knowledge Partnership, commented: "The bill is an assault on all the dodgy income income streams of leasehold - the padded service charges, the insurance commissions and, most important of all, consulting on resetting all existing ground rents to a peppercorn, which is no monetary value, or zero. That is a potential loss of billions to the private equity punters who have elbowed out pension funds in this sector and, where identifiable at all, include some of the richest people on the planet.

He added: "The open question is: if owning a flat in England and Wales is this appalling under leasehold, when is a housebuilder going to stop using this utterly discredited form of tenure and sell either commonhold - like the rest of the world - or ensure flat owners get share of freehold and thus control the management of these blocks themselves."

However, now there are reports that the government could U-turn on its original pledge to turn all ground rents to peppercorn. Here's everything you need to know.

What is a leasehold?

If you have a leasehold, you buy the property - but not the land it sits on. The land is still owned by the freeholder. Leaseholders also only have ownership of the property for a set period of time. This can range from years to decades to centuries, depending on the length of the lease, but the freeholder has the power over which period of time they want to sell the property for.

Leaseholders also usually have to pay ground rent to the person who owns the land. They also have to pay to extend the leasehold period, meaning very high costs can be accrued. If the lease expires, ownership of the property expires and is passed back to the freeholder.

Leaseholds are most common with flats, but there are leasehold houses too. It is estimated that the leasehold system is used on more than 4.5 million properties in the UK.

What is a freehold?

A freehold then is when you own the property and the land it is built on - essentially, you own your home outright. You don’t have to think about lease periods, ground rent, or any maintenance fees. This is the most common way to buy a house in the UK.

What does the Leasehold and Freehold Reform Bill mean for me?

If you're currently a leaseholder, this bill will make it easier and cheaper to extend your lease - which currently can cost upwards of £10,000. Owners will no longer have to have lived in their properties for two years to extend the lease, and the it will also make it easier for leaseholders to buy their freehold.

The standard lease extension term will become 990 years for houses and flats, as opposed to current 50 years for houses and 90 years for flats. This means once you extend your lease, you'll never need to worry about it again.

It will also have an impact if you're a leaseholder in a block of flats. The government says it will give "leaseholders greater transparency over their service charges by making freeholders or managing agents issue bills in a standardised format that can be more easily scrutinised and challenged".

The bill will make it easier for leaseholders to take over the management of their building if they're unhappy with the current structure, and appoint a managing agent of their choice. The government will require freeholders, who manage their building directly, to belong to a redress scheme so leaseholders can challenge them if needed.

And leaseholders will no longer have to pay their freeholder’s costs when making a claim. Gove has also said the bill will ban "excessive buildings insurance commissions for freeholders and managing agents".

Separately, the government has a consultation on capping ground rents. All new houses will be freehold unless there are exceptional circumstances.

Is the government set to U-turn on abolishing ground rent?

One of the key pledges of the initial proposal was to look at turning all ground rents to peppercorn (which effectively abolishes them). Ground rent is the charge levied by a freeholder to a leaseholder for effectively using their land. As opposed to a service charge, the leaseholder gets nothing in return. Some ground rents have clauses which double every year or so.

However, the Sunday Times has reported that Gove has had to abandon the peppercorn pledge after resistance from the Treasury. Officials have apparently argued this could affect pension investments, although campaigners say this has been exaggerated.

“Gove has instructed officials to keep fighting but they know they are fighting on losing ground,” a source told the paper. “The wider danger is that they lose the peppercorn thing entirely.” The Housing Secretary is reportedly willing to cap ground rents at £250 per year as a compromise.

When asked by NationalWorld about the potential U-turn, Rishi Sunak's official spokesman said the government was studying the ground rent consultation and would respond in due course. He continued: "We have said that we do not believe it is fair that leaseholders face unregulated ground rents, and that's why we've consulted on a range of options to cap ground rents for existing leaseholders.

"I'm not going to pre-empt the government's consultation, what I would point you to is the fact that we have already legislated to put an end to ground rents for new residential properties."

What has Labour said?

The Labour Party has accused the government of watering down its leasehold reforms, after Gove initially said he would ban leasehold altogether. Now new-build flats will remain leasehold, and only new-build houses will automatically be freehold.

Labour said that the Conservative government first pledged to protect homeowners from "feudal" leasehold practices on 21 December 2017. After six years and 115 further press releases or announcements on leasehold, the opposition says they are still yet to deliver on the pledge.

Shadow Housing Secretary Angela Rayner said earlier this month: "Labour will deliver more action on housing in six months than this crumbling Conservative government has managed in six years. After years of paper promises on housing, this King’s Speech is set to completely overlook housebuilding and backtrack on pledges made years ago.

“This is no time to wait. Labour’s plan would get Britain building again with a housing recovery plan, creating a generation of new towns and unlocking economic growth across Britain. We will not duck the difficult issues as the Tories have. We would abolish no-fault evictions and fix the broken leasehold system once and for all."

Following the reports of the ground rent U-turn, Rayner said: "This latest dithering from the Government on leasehold reform in the face of Tory infighting is yet another sign that Rishi Sunak is too weak to deliver for working people."

Ralph Blackburn is NationalWorld’s politics editor based in Westminster, where he gets special access to Parliament, MPs and government briefings. If you liked this article you can follow Ralph on X (Twitter) here and sign up to his free weekly newsletter Politics Uncovered, which brings you the latest analysis and gossip from Westminster every Sunday morning.