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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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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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Nationwide and UK Finance welcome government leasehold reforms

Nationwide and UK Finance both welcomed the Government’s announcement on how it intends to address onerous ground rents and leaseholds.

The government plans to legislate to prevent the sale of new-build leasehold houses except where necessary such as shared ownership. And they plan to ensure ground rents on new long leases, for both houses and flats, are set at zero.

Chris Rhodes, Nationwide’s director for products and propositions, said: “We welcome the government’s positive measures in addressing onerous leasehold terms and escalating ground rents.

“We hope this encourages providers to review their lending criteria in this area and also guide homebuilders on future developments.

“This is the very reason why we made the decision back in May to become the first major lender to not lend on properties affected by unreasonable multiplying leaseholds that double every five, 10 or 15 years.

“The maximum acceptable starting ground rent on all new build leasehold properties is limited to 0.1% of the property’s value, while our minimum acceptable lease term on new build transactions are now 125 years for flats and 250 years for houses.”

Paul Smee, director of mortgages at UK Finance, said: “We support the DCLG’s efforts to address the onerous and potentially unfair issues surrounding the leasehold system.

“Lenders will continue to work with government and other interested parties to address the complexities associated with leasehold properties, particularly where valuation is concerned.”

Other legislation includes working with the Law Commission to support existing leaseholders and make the process of extending a lease or purchasing a freehold much easier, faster and cheaper.

The government also plans to provide leaseholders with clear support on the various routes to redress available to them.

They plan to ensure freeholders have equivalent rights to leaseholders to challenge unfair service charges.

There will be a wider internal review of the advice and support to leaseholders to make sure it is fit for purpose with this new legislation.

Source: Mortgage Introducer