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Government response to leasehold market review

Print publication

06/02/2018

In August we explained that the Government was consulting on perceived unfairness in the leasehold market, including the sale of new leasehold houses and onerous ground rents; the recovery of possession for arrears of ground rent; and the inability of freeholders on shared estates to challenge the reasonableness of service charges. Today, 21 December 2017, the Government has published its response.

The “PPI of the property sector”?

Diversity in Low Cost Home Ownership (or, Immediate Market) options, coupled with economic pressures facing borrowers of all ages and across all socio-economic groups today, is resulting in mortgages increasingly being offered on leasehold flats, retirement housing, shared ownership arrangements, and so on. While leasehold has traditionally been the appropriate form of land ownership for properties within communal buildings and estates, a recent trend has emerged over for housebuilders to sell new-build houses as leasehold properties.

Earlier this year the BBC announced that: “Almost half of all newly built properties in the UK are sold as leasehold rather than freehold properties. Some homeowners have found they are then tied into paying a ground rent that increases every year.”

The reason for this is commercially motivated. Housebuilders sell the leasehold title to the house owner and then make a further financial return by selling the freehold title to a third party – often a profit-making entity owning a number of such properties.  Many homeowners in this situation are starting to discover that their lease includes a clause which provides for ground rent to increase at a significant and unexpected rate. This can lead to them being unable to buy-out the freehold owner and also unable to sell the property on because the issue is adversely affecting saleability.

One MP has described this practice as the “PPI of the property sector”. In an attempt to address these, and related, issues, the Government has consulted on various matters, including the following, in its consultation paper ‘Tackling unfair practices in the leasehold market’:

  • whether and how the Government should limit the sale of new leasehold houses
  • what reasons are there for houses to be sold with leasehold (as opposed to freehold) tenure
  • whether and how the Government should limit the reservation and increase of ground rent on new residential leases
  • what effect the restriction of ground rents would have on the supply of new build homes
  • whether arrears of ground rent should be exempted from ‘Ground 8’ possession orders made pursuant to the Housing Act 1988
  • whether freeholders occupying shared private estates should be given rights to challenge the reasonableness of estate service charges similar to those enjoyed by leaseholders.

Government response

The Government received some 6,000 responses, the majority of which were from private individuals. Today, 21 December 2017, the Government has published its consultation response.  The key points to note are:

  • New legislation will prohibit new long leases being granted on residential houses (whether new-build or existing houses).
  • The Government will work with UK Finance to address any misunderstanding of lending criteria in relation to leasehold property.
  • The legislation will ensure that ground rents on new leases of houses and flats are set at a peppercorn rate only.
  • The Government has written to developers to discourage the use of ‘Help to Buy’ equity loans for the purchase of leasehold houses.
  • A number of developers have already introduced schemes to compensate existing leaseholders with onerous ground rents. The Government wants to see such support accelerated and extended to all affected leaseholders (including second-hand buyers) and for all developers to proactively contact customers.
  • The Government will work with redress schemes and Trading Standards to provide leaseholders with comprehensive information on the available routes to redress, including where their conveyancer has acted negligently, and the Law Commission will consider whether unfair terms apply when a lease is sold on to a new leaseholder.
  • The Law Commission will also consult on introducing a prescribed formula that makes it easier for leaseholders to buy the freehold of their home, while providing fair compensation to the landlord.
  • The Government will consider what it can do to get commonhold [1] off the ground across the property sector, including working with mortgage lenders. (Commonhold was not successful when first introduced because of the financial incentives for developers in building leasehold.)
  • Where ground rents exceed £250 per year or £1,000 per year in London, a leaseholder is classed as an assured tenant. This currently means that leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent, even where arrears are minimal. The Government has committed to action to address this, to ensure that leaseholders are not subject to unfair possession orders.
  • New legislation will give freeholders who pay charges for the maintenance of communal areas/ facilities equivalent rights as leaseholders to challenge the reasonableness of service charges.       The Government will also ensure that, where a freeholder pays a rentcharge, the rentcharge owner is not able to take possession or grant a lease on the property where the rentcharge remains unpaid for a short period of time.

The response also states that the Government is committed to improving the situation of leaseholders more generally, and the proposals outlined so far are a starting point only. The Government is now working to help professionalise managing agents, tackle unfair service charges and give consumers greater choice over who their agent is, and a call for evidence on this closed on 29 November.  The Government also wishes to ensure that all landlords are signed up to redress schemes and will be consulting on whether this should also be extended to landlords who grant long leases, and will look at ways to modernise the home buying process, including addressing the particular challenges faced by leaseholders. A call for evidence on these issues closed on 17 December.

WM Comment

This leasehold market review and response is likely to result in some significant market and practice changes for housebuilders/developers, mortgage lenders and homeowners alike. Walker Morris will continue to monitor and report on key developments.

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[1] Commonhold is a type of freehold ownership which is created by a further registration at the Land Registry. Commonhold combines freehold ownership of a single property within a larger development, with membership of a company limited by guarantee that owns and manages the common parts of the development. It allows the owners of each unit within a development to be in control of the development, without a landlord or other party able to make decisions about how the development is run.

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