The Salary Calculator

A Deep Dive into Leaseholds and Upcoming Reforms

by Madaline Dunn

Leaseholds now account for almost 20% of the UK’s housing stock, and while their numbers have plateaued in recent years, complaints about them have not.

According to figures from the Property Ombudsman (TPO), it received 6,649 complaints about residential leaseholds last year — a 67% year-on-year increase.

Against this backdrop is a wave of reforms, which the government says will “improve the lives of millions of existing leaseholders.” However, the outlook for their implementation remains unclear.

Amidst these upcoming changes, this week at The Salary Calculator, we’ll help break down:

• What is a leasehold?
• How do leasehold charges work?
• What is the Leasehold and Freehold Reform Act 2024?
• What role will a judicial review play in the Act’s implementation?
• What other reforms are ahead?

What is a leasehold?

England’s leasehold system finds its roots in the Middle Ages. Back then, landowners would grant peasants permission to live and work on their land in return for their services or rents. This centuries-old system has evolved over the years, with the Law of Property Act 1925 establishing the foundations of the modern leasehold.

But while many other countries have moved away from this system, leaseholds are now the most common form of flat ownership in England and Wales. London, in particular, has become a hub for this type of ownership structure, with leaseholds accounting for over a third of all homes in the city.

When purchasing a leasehold flat, a tenant enters into a lease agreement with the freeholder to use the property for a fixed term.

Unlike freeholders, leaseholders do not own the building they live in or the land on which it is built.

Occupants are also required to comply with the restrictions detailed in their lease agreement.

Leasehold terms vary, but typically span either 99, 125 or 999 years.

When selling a property, the lease does not reset; instead, it is passed on to the next buyer, with the lease length reducing each year. If the lease ends without an extension, the land and property return to the freeholder.

Shared ownership is a type of leasehold involving the purchase of a share in a home. The shared owner pays the mortgage on their share and rent on the remainder, with the option to increase the share they own over time, a process known as staircasing.

There are around 250,000 shared ownership properties in England, according to the BBC. 

How do leasehold charges work?

One of the fees associated with leaseholds is an annual service charge, which is paid to the freeholder. These fees are intended to cover communal repairs and maintenance, whether that’s the lighting in communal areas or fixing a lift.

Ground rent, on the other hand, is a fee paid to the freeholder for the right to occupy the land on which the property is built. The freeholder does not provide a service in return for this fee.

As of 30 June 2022, ground rents on new residential leases were effectively banned — although this doesn’t apply to those with existing leases.

In recent years, controversies surrounding these charges have hit the headlines, with reports of leaseholders facing spiralling service charges and ground rents.

“Service charges keep rising whilst services disappear — and in some cases, have never appeared at all”

According to an analysis by estate agent Hamptons, last year saw record annual increases for service charges in England. In fact, the average annual service charge exceeded £2,000 in every region for the first time. The analysis also showed that for more than half of leaseholders, service charges outstripped their council tax payments.

Elsewhere, The Property Institute’s (TPI) 2024 Service Charge Index found that since 2019, service charges were up 41%, compared with a cumulative inflation rate of 23% over the same period.

Ben Jenkins, a housing campaigner with a shared ownership property, has experienced these rising costs firsthand.

“It was sold to us as a route to stability, but the reality has been very different,” explained Jenkins, who said that it has become “unaffordable, unjust, and unsafe.”

“Service charges keep rising whilst services disappear — and in some cases, have never appeared at all. Our building falls into disrepair, and many are too afraid to withhold payment because of the very real threat of eviction. That’s not ownership. That’s tenancy in disguise,” added Jenkins.

For Jenkins, who described the current system as “fundamentally broken,” the most important change he wants to see is “proper oversight.”

“When things go wrong, there’s no meaningful way to hold landlords accountable. That has to change,” added Jenkins.

Indeed, in a recent report, the London Assembly Housing Committee found that in the capital city, affordability and transparency are key issues within shared ownership and leaseholds more broadly.

The survey revealed respondents paid a median average of £3,912 per year on service charges.

For one in 10, this shot up to over £7,000 a year.

Sem Moema AM, former Chair of the London Assembly Housing Committee, said that often Londoners have “no clear idea of what they are receiving in return for their money.”

What is the Leasehold and Freehold Reform Act 2024?

The government framed the Leasehold and Freehold Reform Act 2024 as a tool to address these affordability and transparency issues.

Receiving Royal Assent in May 2024, the Act outlined various changes, including plans to make it “cheaper and easier” for leaseholders to extend their lease or purchase their freehold, as well as increased transparency around service charges, with the right to request information about them.

“The intention is to swing the pendulum of power away from freeholders”

The Act also removes the ownership condition, making leaseholders immediately eligible to extend their leases.

“The overall intention of it is clearly to swing the pendulum of power away from freeholders and take it more to leaseholders,” said Jill Carey, partner at Freeths, who explained that one of the biggest financial implications of the legislation is the removal of marriage value.

Marriage value refers to the increase in a property’s market value when a leaseholder extends their lease. Under the current legislation, when extending a lease shorter than 80 years, half of this must be paid to the freeholder.

“For leaseholders whose leases are already below 80 years, the impact will be to make extensions cheaper, as it will be removing a third of the calculation of the sum that they have to pay,” Carey said.

However, for leaseholders whose leases have more than 80 years left to run, it’s not so clear-cut, and could even increase the cost, she explained.

According to the government’s Leasehold Advisory Service (LAS), the reforms will be implemented in stages, requiring further consultation and, in some places, secondary legislation.

The government has now launched its consultation on the legislation, which will run until 26 September 2025.

But, leaseholders eyeing the lease extension reforms could be waiting until 2026 to see the changes rolled out, the LAS said.

For those navigating leasehold extensions within the current system, Carey said: “The most important thing is to stay informed and to take expert advice to ensure that you keep yourself in the best position, as it is a changing area.”

Carey noted that, in particular, tenants should be aware of their ground rent charges, as the new statute will cap this at 0.1% of property value.

“This could affect decision-making for anyone who is calculating the cost of extending their lease or buying their freehold,” she said.

“Leaseholders of flats may also want to consider consulting with their fellow tenants on issues such as enfranchisement. However, there are some parts of the law that are yet to be refined, and there is an ongoing [judicial review] by a group of large landlords, and so it may be that some things change before implementation,” added Carey.

What role will a judicial review play in the Act’s implementation?

Indeed, a group of seven freeholders — among them the Grosvenor and Cadogan Estates — were granted permission for a judicial review back in January. In their legal challenge, the freeholders argue that the Act is incompatible with the right to ‘peaceful enjoyment’ of property under the Human Rights Act 1988.

Freeths’ Carey explained that while the court doesn’t have the power to overturn the Act, the aim is to put pressure on the government to “undo it”

“We’ve just seen this happen with that on private school fees,” said Carey. “There, the challenge was lost, but had it gone through, had they won it, the government would then have found itself in a situation where it had a declaration from the court that its law was incompatible with human rights, and that’s what they’re going for here.”

“This could be a very protracted process”

Linz Darlington, the director of leasehold extension specialists Homehold, explained that even if the freeholders lose at the High Court, there are various avenues through which they can appeal.

Further, Darlington highlighted what he called an “intersection” between the legislation’s complexity and contentiousness, whereby each time issues are resolved within the legislation, fresh legal challenges could arise from the freehold community.

“This could be a very protracted process,” he added.

The freeholders’ judicial review will be heard from 15-18 July.

What other reforms are ahead?

While the Leasehold and Freehold Reform Act moves forward slowly, the government is simultaneously working on additional legislation in the form of the Leasehold and Commonhold Reform Bill.

Commonhold is a type of ownership in which homeowners own their property outright without a lease. Homeowners and other unit owners in a building all own and are responsible for the shared parts of the property. The directors of the association also have the option to appoint an external managing agent to manage the commonhold.

Commonholds afford homeowners more control, with zero ground rent, greater service charge transparency and no risk of forfeiture.

This type of ownership was introduced back in 2004 through the Commonhold and Leasehold Reform Act. But, since then, uptake has been low. There are only around 20 commonhold developments across England and Wales today.

In March, the government published its Commonhold White Paper, the first step in its plan to make commonhold the “default tenure.”

The proposed “ban” on leaseholds would only apply to new flats.

“In theory, this is a great idea,” said Darlington, who explained that the ownership model allows homeowners to buy into a democracy.

However, it’s not without its challenges.

Darlington explained that while the commonhold reforms are likely to apply to new blocks, making them less contentious, it will require different parties — including managing agents, conveyancers, and mortgage companies — to learn and adapt.

“None of this is insurmountable, but it is quite complex,” said Darlington.

Meanwhile, on the homeowner side of things, Carey said challenges can arise in getting everyone within a shared freehold engaged and in agreement.

And while some housing campaign organisations have welcomed the white paper, issues have been raised, including the risk that the legislation could create a two-tier system that leaves existing leaseholders behind.

Katie Kendrick, founder of the National Leasehold Campaign (NLC), argues that commonhold conversion mechanisms are “essential to offer an escape route for those trapped.”

In a statement back in November 2024, Matthew Pennycook, Minister of State for Housing and Planning, said that the government intended to publish a new Draft Leasehold and Commonhold Reform Bill in the second half of 2025.

Tags: Commonhold, Leaseholds