Leasehold Reform – the next chapter

As expected, the key provisions will be a ban on the creation of new leasehold houses and a ban on ground rents in leases. Whilst the Government has not confirmed a timescale for passing the new legislation, they have confirmed there will be no transitional period once the measures have been voted into law. The Government’s view is that as the issues have been much publicised for a number of years, with the Government making it clear that they were looking to legislate on this matter, developers have already been given sufficient lead-in time to deal with any necessary changes. The key date is 21 December 2017 (the date of the Government’s initial announcement). Accordingly only leasehold land held on or before 21 December 2017 will not be subject to the leasehold ban. Option agreements entered into prior to December 2017 will not be exempt (if they are yet to be exercised) on the basis that it is the choice of the party to exercise the option agreement or not.

The four main areas of residential leasehold reform the Government’s response focuses on are summarised below.

Ban on new leasehold houses

The Government has confirmed that the ban will apply to new residential long leases (of over 21 years) of new build or existing freehold houses. The Government has stated that whilst they are yet to finalise the definition, “house” will include self-contained single dwellings and self-contained buildings or parts of buildings (structurally detached or vertically divided) and that a fully worked up legal definition will be provided in the draft regulations. Due to maintenance requirements the definition of a house will not include properties that are above or below another property or associated structure (such as underground car parks).

The Government has confirmed that the following leasehold houses will be exempt from the ban:

1. Shared ownership properties
2. Community-led housing
3. Inalienable National Trust sites and excepted properties on the Crown estate
4. Retirement properties
5. Home reversion plans (equity release schemes) and home purchase plans (lifetime leases and Islamic/Sharia compliant finance), where non-assignable leases are used
6. Building leases as long as the end consumers are purchasing houses on a freehold basis
7. Agricultural tenancies governed by the Agricultural Holdings Act 1986 and the Agricultural Tenancies Act 1995.

Even if an exemption applies, any lease of a house will have to be granted on acceptable terms. The consultation response indicates these are likely to include, restricted ground rents (see below), transparency of service charges and the use of covenants and permission fees,  minimum lease terms (although it is the Government’s view that a reasonable length of lease will usually be provided due to mortgage lender requirements in any case), and a right of first refusal of the sale of their freeholds to third parties without their knowledge (i.e. a right to buy the freehold as is currently provided to leasehold flat owners).

Once the legislation is in place, an applicant for registration of a new lease of a house will need to make a declaration as to its compliance with the legislation before it can be registered at HM Land Registry. Where the lease is ascertained at a later date to be non-compliant with the legislation then the purchaser (and any successor in title to the property – without time limitation) will be entitled to enfranchise the property at nil cost and the developer shall be under an obligation to pay the leaseholder’s costs of enfranchisement. As a further deterrent the Government has confirmed that the Secretary of State will have power to make regulations imposing financial penalties on landlords who have breached the leasehold ban, with the potential for higher penalties for repeat offenders. The lease itself however will not be void.

Ground rents

Rather than cap ground rents in future long residential leases to £10 as stated in its 2018 consultation, the Government has gone one step further; the ability to monetise ground rents will be removed by capping ground rents to a peppercorn (i.e zero financial value).

The Government has specifically stated that shared ownership leases will also be subject to the ban on ground rents, ensuring that no ground rent may be charged on top of the rent payable on the landlord’s retained equity.

However, the Government has confirmed that the following will escape the ground rent ban:

1. Community-led housing
2. Certain National Trust and Crown estate properties
3. Retirement properties and certain leases granted to facilitate home reversion plans
4. Mixed use leases (being a single lease demising both commercial and residential property) will escape the ground rent ban.

Voluntary lease extensions will not require ground rents that already exist to be removed for the unexpired residue of the existing term, however the extended term of years will be subject to the cap.

Any ground rents charged (outside the exemptions) shall be unenforceable and where a lessee has been charged ground rent (outside of the above mentioned exemptions) an application to the First-tier Tribunal for a refund and any associated costs may be made – this right is not time limited. Freeholders who flaunt the rules on ground rent may be subject to a fine up to £5,000 per property (and the Secretary of State will be granted the ability to increase penalties for repeat offenders).

Service charge protection

The Government has confirmed that freeholders paying an estate charge should be put on parity with leaseholders and accordingly they will be able to challenge the reasonableness of estate rent charges. This will include the right to apply to the First-tier Tribunal for a new manager to be appointed to manage the provision of the services covered by the estate rent charge.

The questions of residential freeholders’ right to manage will be revisited once the Law Commission have completed their current review of the right to manage.

Replies to management enquiries on a sale of leasehold property  

In order to reduce the delays and costs suffered by sellers of leasehold properties seeking leasehold information from landlords and managing agents, a statutory deadline of 15 working days and a maximum fee of £200 plus VAT (with a requirement for any fee to be reasonable) for producing the leasehold information will apply where the request for information is made using the leasehold property enquiry information form (LPE1). The Government’s response does not confirm what the position is where LPE1 form is not used.

Any fees for an update to a set of replies will be capped at £50 + VAT. To ensure compliance leaseholders will also be granted the ability to challenge unreasonable fees via the First- tier Tribunal.

Conclusion

Numbers do not lie. The Government’s approach is already having a drastic impact even before its implementation – the number of new-build leasehold houses being brought to market in quarter 4, 2018 was 2% down from 17% in quarter 1 of 2017.

The detail now provided should allow developers to ensure they do not bring any non-compliant houses to the market. The Government has made it clear that they are expecting developers to start bringing compliant properties to the market now or suffer the consequences at a future date.

There remains substantial uncertainty for existing leaseholders who already hold leases containing onerous ground rents.  The Government is pressuring the freeholders of such leases to assist their leaseholders. For example, they launched the “public pledge for leaseholders” in March 2019 which saw more than 60 developers and freeholders sign up to a commitment to stop leaseholders being trapped in costly deals (by entering into variations amending onerous lease provisions for example). However, further legislation to assist existing leaseholders cannot be ruled out.