Leasehold reform is a current hot topic. Following on from the Housing White Paper in February 2017, the Government consulted on some practices that have developed in the long leasehold market and responded to the consultation in late December.

Main issues

The 2017 Consultation looked at four main issues:

  • the sale of new leasehold houses
  • imposing limits on ground rents
  • protection for long leasehold owners against possession orders, and
  • rights for freeholders to challenge the reasonableness of estate service charges.

Government proposals

Leasehold houses – new legislation is to be passed as soon as Parliamentary time allows preventing the grant of long leases over houses.  There will be exemptions for schemes such as shared ownership and other cases where leasehold houses can be justified.  Other than in exceptional circumstances, the Government can see no good reason for houses to be sold on a leasehold basis and it is concerned about the rising costs for consumers to buy their freehold.

Ground rents – new legislation will set ground rents on new leases of houses and flats at a peppercorn.  The Government noted that ground rents have risen from small sums to, in some cases, hundreds of pounds per year.

Possible right of first refusal for tenants of houses – the Government’s response paper suggests that it will consider introducing a right of first refusal for tenants of houses.  This would prevent developers selling freeholds on houses to investment companies without the leaseholder having a chance to purchase.

Protection against possession orders – a knock on effect of increasing ground rent is the ability for landlords to take possession under the Housing Act 1988. Where rents in leases exceed the “low rent threshold”, being £250 pa outside Greater London or £1000 pa in Greater London, the lease can qualify as an assured tenancy, so that Housing Act grounds for possession can become available.  Legislation will exempt long leaseholders from these possession orders.

Freehold service charge arrangements – the Government will legislate to ensure that freeholders will have the same rights as leaseholders in challenging the reasonableness of service charges under the Landlord and Tenant Act 1985.

Reduced remedies for rentcharge owners – to counteract a recent case[1] where a rentcharge owner used the remedy of granting a lease to a nominee trustee due to arrears of rentcharge, legislation will prohibit the rentcharge owner from granting a lease on the property and also from exercising the right to take possession.

The purpose of the Government’s response is to promote fairness for consumers in the housing market. Long leaseholds have had a bad press for a while and it aims to comfort those looking to get into the market. Sajid Javid has written to housebuilders discouraging them from using the Help to Buy equity loan scheme for the purchase of leasehold houses in advance of the proposed new legislation.  He encouraged schemes to redress problems for consumers with high ground rents and vowed to keep a close eye on the situation.

The identified issues risk an effect on marketability.  The Nationwide Building Society took the lead last May when it announced that it was taking steps to protect its mortgage members from onerous leasehold terms.  Its lending terms require a minimum lease term of 125 years for new build flats and 250 years for houses and a maximum starting ground rent limited to 0.1% of the property’s value.

The Government’s proposals will be welcomed by consumers wishing to enter the housing market.  They will need careful consideration by housebuilders both in terms of their financial appraisals for sites and whether they will tailor new schemes to incorporate any of the proposed reforms in advance of legislation.

This blog post was written by Senior Associate and PSL in Gateley Plc’s Real Estate team, Sally Newton.

[1] Roberts & Ors v Lawton & Ors [2016] UKUT 395 (TCC)

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.