Shortly before Christmas the Government published its response to a consultation, issued earlier this year, on “Tackling unfair practices in the leasehold market”.
The consultation arose as a result of adverse publicity surrounding the practice of developers selling new-build houses as leasehold properties and the inclusion of so-called ‘market’ ground rents, with onerous rent review provisions in new leases of both houses and flats.
In its response, the Government proposes some radical changes to the way residential homes, particularly new-build houses and flats, can be sold to prevent the perceived abuse of leasehold ownership structures by some developers and landlords.
While the specific details of the proposals and the timetable for new legislation remains unclear, their impact, particularly for developers and investors in residential property, should not be underestimated.
The proposals will be welcomed by those looking to buy new homes, but will be of limited assistance to existing owners of leasehold houses, and owners of leases with onerous ground rent provisions.
The key proposals are as follows:
- Ban on the sale of new leasehold housesLegislation will be introduced, ‘as soon as Parliamentary time allows’, to prohibit new long leases of houses from being granted and this legislation will apply to both new build and existing freehold houses. The legislation will clearly define the meaning of ‘new build’ and ‘house’, definitions which many argue are currently ambiguous.
It is likely that there will be some exemptions, with one permitting the continuation of shared ownership schemes being mentioned in particular. The Government has said it will work with sectoral partners to consider if there are particular cases where leasehold houses can be justified.
Where land is currently leasehold, so that it is not possible to sell new freehold houses, developers may continue to build and sell leasehold houses on that land. However, to prevent this exception being used as a loophole, such sales will not be permitted where the developer’s lease is created after 21st December 2017 (i.e. the date of publication of the Government’s response).
- Limiting ground rent on new residential leases of houses and flatsLegislation will be introduced to set ground rents in all new leases over 21 years of houses and flats to a peppercorn (i.e. zero financial value). Again, an exemption will be made for shared ownership schemes.
- Remedies for existing owners of leasehold houses or of leases with onerous ground rentsThe ban on the sale of new leasehold houses will not assist existing owners of leasehold houses. Instead, the Government has said that it will consult on proposals to improve the current statutory rights of leaseholders to buy their freehold or extend their lease so that they may do so on more favourable terms.
The proposed new limit on ground rents will not apply retrospectively to existing leases with so-called ‘onerous’ ground rent provisions. Rather than legislating to cap these rents, the Government wants to see developers and freeholders offer redress schemes to compensate owners of existing leases with onerous ground rents, and to proactively contact such owners to offer compensation (some housebuilders have already set up such schemes). The Government does not set out what it considers to be an ‘onerous’ ground rent and this remains open for debate.
- Assured tenancy loopholeAs a result of landlord and tenant legislation for assured tenancies (Housing Act 1988), there is a technical legal issue affecting some long leases of residential properties with substantive ground rents. The legislation currently provides that where ground rents in a lease exceed £250 per year (or £1,000 per year in London) the lease is classified as an assured tenancy and the leaseholder is an assured tenant. As an assured tenancy, the lease can, in theory, be terminated by the landlord for even small sums of rent arrears as the landlord can obtain a mandatory possession order. This loophole creates problems for owners of affected leases in terms of marketability and in obtaining mortgage finance. The Government will take action to address this loophole and ensure that leasehold owners are not subject to unfair possession orders.
- Residential management charges on freehold estatesLegislation will be introduced to ensure that freeholders who pay residential management charges have rights to challenge the reasonableness of such charges, equivalent to the statutory rights that leasehold owners currently have to challenge the reasonableness of service charges.
- Further areas of leasehold reformThe Government will consult and will work with the Law Commission on other possible areas for reform including:
- (as referred to above) simplification of the rights of leasehold owners to buy the freehold interest in their properties, or to extend their leases, with priority given to owners of houses. The Government will consult on introducing a simple prescribed formula that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs. It will also consider the introduction of a right of first refusal (similar to that already available for owners of flats) for owners of leasehold houses.
- The introduction of a minimum term for new long leases of flats.
- Looking at ways to reinvigorate the use of commonhold as an alternative tenure to freehold and leasehold.
- In the longer term, as a consequence of the ban on new leasehold houses, the Government has also said that it will respond to the recommendations contained in the Law Commission’s 2011 Report ‘Making Land Work: Easements, Covenants and Profits a Prendre‘, for reform on easements and covenants to ensure that it is easier for developers to set up freehold schemes with positive obligations relating to estate management and provision of services.
Whilst uncertainty remains over the details of some of the proposals and exactly when they will be implemented, the Government’s commitment to reforming the leasehold market is seemingly resolute. Wide scale statutory reform can be expected in the future. Developers and investors should be pro-active in their reaction to the Government’s proposals and bear them in mind when structuring and financing new residential schemes.