In December 2017 the Government announced it would turn its attention to tackling what it described as ‘unfair practices’ in the leasehold market. A range of measures were announced to make the leasehold market a more transparent system for homeowners, aimed at eradicating ‘onerous’ ground rents, eliminating disproportionate costs to extend leases and, with certain unspecified exceptions, the abolition of new residential long leaseholds for almost all new build houses.
The latest October 2018 consultation sets out how the Government intends to implement these changes.
With a rise from seven to sixteen percent of all house sales being leasehold houses, the Government has brought forward legislation to prohibit new residential long leases from being granted on houses from 21 December 2017 which ‘applies to land that is not subject to an existing lease’. The intention is to backdate the primary legislation required to implement the ban on leasehold houses; this will effectively prevent developers from avoiding the ban by taking new leases of development sites themselves.
The mechanism for prohibiting residential long leases from being granted on houses will be applicable to any freehold land, and any leasehold land acquired from 22 December 2017 onwards. There will be certain instances however (e.g. building leases, agricultural tenancies, and houses that have shared services or are built on land with specific restrictions), where the creation of new leasehold houses cannot be avoided, and these will be exempt from the prohibition. The Government plans to enforce the legislation by making it impossible to register an incorrectly granted long lease at the Land Registry. Thus ‘if contrary to the proposed legislation, a new residential long lease is incorrectly granted on a house, the homeowner will be able to cancel the lease and have the freehold title transferred to them at the earliest convenience’.
Where house owners have responsibility for the upkeep of green space, roads or drainage, as a direct result of local authorities’ reluctance to adopt common parts of developments, the very definition of house could be restrictive and a ‘workable definition is required so that there are no unintended consequences – such as limiting the design or layout of houses,’. The definition would also need to ensure evasion of the ban is not possible.
With an increase in rent levels and a rise in the frequency of onerous review provisions, the Government proposes to stop the modern practice of buying and selling ground rents as an economic asset. Its view is that it is unfair that tenants are required to pay ‘economic rents at levels which are solely designed to serve the commercial purposes of the developer and any future investors’. Thus ground rents on new long leases for both houses and flats will be capped at a nominal value of £10.
Whilst the Government is aware that removing the ability for developers to receive capitalised ground rent income towards the initial land acquisition and outlay for the development costs will reduce the viability and negatively impact on supply; it is more committed to ensuring that consumers only pay for the services that they actually receive and achieve material benefits from.
The ground rent cap will also extend to replacement leases, looking to address historic ‘unfair’ rent provisions and close the loophole of the assured tenancy trap. Where ground rents of residential leases exceed £1,000 a year in London and £250 a year in the rest of the country, long leases may be classed as an assured tenancy. If so, should tenants fall into arrears, they could be subject to possession orders, in turn potentially reducing the security granted by the lease which is less attractive to a mortgage lender.
Notably the proposed legislation will also seek to prohibit any provisions for which demands for higher payments or replacement charges are made. Instead it will require the annual date for payment of ground rent to be specified, and any notice demanding payment of the ground rent to be made at least 28 days before it is due for payment. Protections will, however, be put in place to guard shared ownership schemes, more specifically designed to support affordable ownership. This legislation will not be applicable to mixed use leases or long commercial leases granted for business purposes.
Under the Landlord and Tenant Act 1985 leaseholders have the benefit of extensive controls over the amount they pay for services and the quality of services they receive. In comparison freehold house owners on managed estates currently have no protection. New legislation is to be introduced to ensure freehold owners have equivalent rights to leaseholders enabling them to challenge, amongst other matters, the reasonableness of charges set for the upkeep of communal services and shared areas.
New leasehold houses and ground rent portfolios have been an attractive and long-term secure investment for pension funds, other institutional investors and the public sector alike. The impact of the proposals will almost certainly, if implemented, affect the structuring of new residential schemes, the value of freehold reversions and, for both buyers and lenders, the desirability of houses owned on long leases.
With some further clarity on how and when the proposed changes will take effect, it is clear that the Government is committed to looking at wider reforms to promote transparency including putting consumers’ needs ahead of those of developers and investors.