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Government announces crackdown on leaseholds for new-build houses

Almost all new-build houses will in future have to be sold as freehold, and ground rents will be capped at just £10 a year.

The Government made the announcement at midnight on Saturday, and a new consultation on the plans will be launched today by Communities Secretary James Brokenshire.

The announcement said that leaseholders currently pay on average over £300 ground rent a year, with some paying as much as £700.

There was no suggestion that the move will be retrospective, implying that some recent home owners could still find their properties difficult to sell.

Brokenshire said: “Unfair ground rents can turn a home owner’s dream into a nightmare by hitting them in the back pocket, and making their property harder to sell.

“That’s why I’m taking concrete action to protect home owners and end those unscrupulous leasehold practices that can cost tenants hundreds of pounds.

“While leasehold generally applies to flats with shared spaces, a number of developers have been increasingly selling houses on these terms – placing further financial burdens on those looking to buy a house of their own through unnecessary surcharges like ground rent.

“This can also mean that selling their home is more expensive and take longer than selling a freehold property.

“Under the Government’s proposals, which are subject to consultation, the majority of new houses will be sold as freehold, and future ground rents will be reduced to a nominal sum.

“The consultation will also seek views on what are the appropriate and fair exemptions, such as shared ownership properties and community-led housing to ensure consumers’ best interests are at the heart of the property market.”

Notably, the announcement made reference to the Tenant Fees Bill, saying that the new crackdown on leasehold practices “builds on action under way to make the property market fairer, including a crackdown on rogue landlords and ending unfair charges for tenants”.

The consultation will run for six weeks and estate agents are among those specifically invited to comment.

Yesterday evening, NAEA chief executive Mark Hayward said:  “Thousands of home owners across the country are facing escalating ground rents, charges for making alterations to their properties and unable to sell their home.

“Therefore, it’s only right that the Government looks to crackdown on unfair leasehold practices to stop even more people feeling trapped in homes they cannot afford to continue living in.

“Our recent Leasehold: A Life Sentence? report found almost half (45%) of leasehold house owners didn’t know they were only buying the lease until it was too late, two thirds (62%) feel they were mis-sold and the vast majority (94%) regret buying a leasehold.

“This shows that for too long, housebuilders and developers have not been transparent enough about what it actually means to buy a leasehold property.

“However, this announcement is only good news for those looking to buy a leasehold property in the future.

“With 4.2 million leasehold properties in England, many will remain stuck in their lease with no straight forward way out and the industry needs to help them.”

Source: Property Industry Eye

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Developers inflate leasehold house prices while Government fiddles over ban

Property developers are ruthlessly hiking the prices on leasehold houses ahead of a Government ban, Telegraph Money can reveal.

The cost of the average new leasehold house rose 12pc over the past year, while the price of houses sold on freehold terms – where owners have greater control and protection – went up by less than 1pc.

Property investment platform British Pearl, which analysed Land Registry data, said housebuilders were taking advantage of first-time buyers and the Help to Buy programme.

The Government is consulting on reforming Britain’s archaic property rules, including a crackdown on the sale of new-build leasehold homes.

Investment manager James Newbery said: “Britain’s first-time buyers are already hampered by a chronic lack of housing stock, so for property vultures to take advantage is unforgivable.

“Help To Buy is probably partly to blame, with developers leaping to milk these taxpayer subsidised loans for all they’re worth. They simply jack up the prices of existing stock – knowing buyers facing stiff competition are capable of paying more.”

Under property law, a home bought on leasehold terms is actually owned by the freeholder, who wields great power. They collect ground rent, which in some cases increases dramatically over time, and in some cases can obstruct sales.

While almost all flats are sold with leases, most houses in Britain are freehold. However, developers starting selling houses with leases a decade or so ago as a way to boost profits. A year ago the Government promised to ban the sales of such homes, and its proposals are now out for consultation.

The Government estimates that there are more than 4.2 million leasehold properties in England, representing about 18pc of total housing stock.

Mr Newbery said: “It may be years before homeowners realise they were taken for a ride. The Government needs to legislate as a matter of urgency and ban the sale of houses with leases to protect buyers.”

Source: Yahoo Finance UK

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Radical proposal to make escaping ‘leasehold trap’ easier for homeowners raised by Law Commission

A radical proposal to make it easier and cheaper for homeowners to escape the so-called “leasehold trap” and buy the freehold of their houses has been put forward by the Law Commission.

The legal watchdog suggested a change in the valuation formula in order to reduce prices, and a removal of the requirement that freeholders must have owned their house for two years before making a claim to buy it.

But it said the changes would still provide sufficient compensation for landlords.

There are over four million leasehold properties in England, according to a government estimate. While 1.4 million are houses, the majority are flats.

Leasehold has been described as owning the house, but not the land it is on. In effect, it means the buyer owns a property for a fixed number of years on a lease from the landlord.

The Law Commission’s proposals include reducing the price leaseholders pay to the landlord by changing the formula used to calculate the cost, improving the right for leaseholders to buy the freehold from their landlord, and introducing an alternative right to purchase unlimited longer lease extensions without a ground rent.

It also suggested making the enfranchisement procedure simpler to understand, as well as removing the need for leaseholders to have owned the lease for two years before making a claim.

The proposals recommend potentially scrapping whether leaseholders should contribute to their landlord’s legal costs, or a cap on the maximum amount they should pay.

The law commissioner, Professor Nick Hopkins, said: “Enfranchisement offers a route out of leasehold but the law is failing homeowners: it’s complex and expensive, and leads to unnecessary conflict, costs and delay.

“We’ve heard of untold stress caused to homeowners who have had to put their lives on hold because of issues with their leases.

“Clearly, that’s not right, and our solutions for leasehold houses will provide a better deal for leaseholders and make sure that the law works in the best interests of house owners.”

The proposals come after the government announced plans to ban the sale of houses on a leasehold basis.

The Law Commission will publish a consultation paper in September which will be subject to full public consultation.

Source: Yahoo Finance UK

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Rip-off leasehold reforms ‘don’t go far enough’, say campaigners

When people buy their own homes they believe they will own their house – but for many leasehold homeowners, the true owner of their home is a faceless company which can sell on their stake without their knowledge or consent.

Jo Derbyshire bought her home near Bolton, Greater Manchester, eight years ago. She was aware she was buying a leasehold and knew the ground rent of £300 year would double every 10 years.

The mother-of-two planned to buy the freehold, priced at £5,000, as soon as she had the money. But a year later the property developer sold it to an offshore investment company which repriced it at £50,000.

She says: “It’s a huge amount of stress and worry and I don’t really know if I’m a homeowner anymore.

“When I first bought this house with the leasehold, my understanding was that I owned the house but I didn’t own the land. Whereas I’ve found out that legally I’m effectively just a tenant and I’m paying a huge mortgage for the privilege of having the right to live in this property for the terms of the lease but I don’t actually feel like I own it.”

Ms Derbyshire is now stuck with a doubling ground rent which will cost almost £10,000 a year after 50 years of ownership. This sort of practice has been labelled the PPI of the housing industry.

While Scotland has abolished leaseholds, there are more than 4 million people like Ms Derbyshire in England, trapped in lease agreements and worried about their home ownership. Around 100,000 homebuyers are thought to be in contracts with spiralling ground rents, paying around £4bn in service charges.

The Government says it is “unacceptable for homebuyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms”.

And the Ministry of Housing, Communities and Local Government has announced new measures “to cut out these unfair and abusive practices”.

Among the Government’s new proposals is a ban on the sale of new properties as leaseholds, but that doesn’t help the thousands of people trapped in existing rip-off leases like Ms Derbyshire. And many are calling on the Government to do more, sooner.

Sebastian O’Kelly of the Leasehold Knowledge Partnership says: “My appeal is to the MPs on the Communities Select Committee to call in these housebuilders, the chief executives who are on ridiculous remuneration packages, one getting a bonus of £120m for example, and call in the chief executives of the ground rent funds.

“So far as we can identify them of course, the ones based offshore might be a bit more tricky, but call them in and give them the Phillip Green treatment. These people hold the destiny of millions of people’s lives in their hands and they’ve seriously disadvantaged them with these rip-off leases.”

For Ms Derbyshire she has little option but to stay in the house she’s bought, feeling like a tenant, campaigning for change.

“It’s a real David and Goliath fight where we’ve got all these developers who are making, let’s face it, obscene profits from building houses and selling freeholds against us hardworking families and we’re trying as hard as we can to make change happen,” she says.

The Government’s leasehold reforms are expected to come into force in 2019.

Source: Yahoo Finance UK

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The Government Proposes Radical Reforms To Stop Unfair Leasehold Practices

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:

  1. 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).

  2. 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.
  3. 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.

  4. 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.
  5. 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.
  6. 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.

Source: Mondaq

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Real Estate Update: The Government reacts to Leasehold Issues

In July 2017 the Government published a consultation document in order to obtain the views on the most needed areas for reform within the leasehold market. Over 6,000 replies were received with leasehold houses and ground rents being the most pressing for reform. There were two headline proposals which arose as a result of the consultation document. The Arguments

Pursuant to Section 14(A) of the Limitation Act 1980 (the “Act”) the period in which a claim must be issued before it is statue barred is either, six years from the date on which the cause of action accrued, or three years from the date on which a claimant has the requisite knowledge to bring the claim.

Limiting the sale of new build Leasehold Houses

The Government have previously said that, other than in exceptional circumstances, they cannot see any good reason for new build houses to be sold on a leasehold basis, and their view on this remains the same. The results of the consultation confirm that the Government are planning to bring forward legislation as soon as Parliamentary time allows to prohibit new residential long leases from being granted, be it new build or on existing leasehold houses. However, the Government have indicated that it will still be possible for existing leaseholders to extend their lease or purchase the freehold and the Government intend to consult on proposals to support currently leasehold owners to be able to do this on more favourable terms. The Government have also indicated that they plan to ensure new legislation clearly defines terms such as “new build” and what a “house” is, in order to avoid any unintended consequences and have confirmed that they will work alongside UK Finance more in order to address the misunderstanding of lending criteria which, the results of the consultation flagged, is associated with leasehold properties.

Despite the above, the Government are aware that they will not be in a position to prevent developers building and selling leasehold houses on land that is currently subject to a lease. They will, however, ensure that future legislation contains exemptions in this regard and have confirmed that other exceptions will be considered when the legislation is brought forward, for example if there are particular cases where leasehold houses can be justified, and, if so, to work with sectoral partners to ensure that they are provided on acceptable terms to the consumer.

The Government will, however, ensure that the ban the sale of leasehold houses applies to land that is not subject to an existing lease as at December 2017.

Limiting the reservation and increase of ground rents on all new residential leases over 21 years

Overall, the results of the consultation confirmed that anything that affected the value of the property should be classed as onerous. It was also noted that ground rents can become onerous where leases on houses are extended under the 1967 Leasehold Reform Act. Over 40% of the responses given in the consultation stated that there was no justification for ground rent and no clear reason why these should be any more than a peppercorn, however others cautioned about prohibiting ground rents, indicating that they ensure that the landlords retain an interest in the investment and covered the landlord’s costs.

The Government confirmed their concerns that ground rents have risen from historically small sums, to hundreds of pounds per year in many cases. Although no specific proposals to address onerous ground rents have arisen from the results of the consultation, the Government intend to introduce legislation so that, in the future, ground rents on newly established leases of houses and flats are set at a peppercorn, i.e. have zero financial value. This would result in the costs incurred by the landlord for overseeing and appointing a managing agent being recovered through the service charge or a marginally higher sale price, meaning costs are more transparent and reasonable, with a leaseholder having the right to challenge any unfair service charges through the courts.

Following the results of this consultation, the next steps are for the Government to draft the required legislation and for this to then be brought before Parliament to be considered.

It is worth remembering that the outcome of the consultation document are currently only proposals, however, the high profile of leasehold reforms may result in the Government treating this as a priority.

Source: Lexology