It has been 18 months since Sajid Javid, previous Secretary of State for Housing, Communities and Local Government announced a “crack down on unfair leasehold practices”. This included “new measures announced to cut out unfair and abusive practices within the leasehold system including a ban on leaseholds for almost all new build houses”.
The measures introduced were to include:
- Legislating to prevent the sale of new houses on a leasehold basis save where necessary such as shared ownership.
- Setting ground rents on new long leases at zero.
- Working with the Law Commission to make the process of purchasing a freehold or extending a flat lease “much easier, faster and cheaper”.
- Providing leaseholders with clear support on the various routes to redress available.
- A wider internal review of the support and advice available for leaseholders.
- Ensuring freeholders have equivalent rights to challenge unfair service charges.
Tenmonths later a consultation was launched with regard to the use of leasehold for house sales, the reduction of ground rents, service charge protection for freeholders and the time and cost of obtaining management information from a landlord on the sale of a leasehold unit. The consultation closed in November 2018.
There are other consultations running with regard to the existing enfranchisement legislation for collective purchase of the freehold reversion to a block of flats, individual flat owners’ right to extend their lease, the Right To Manage and Commonhold.
In March this year a select committee made recommendations to the government, the CMA and the Law Commission which recommended that ground rents in new leases be set at £0.
On 27 June, James Brokenshire, the current Secretary of State for Housing, Communities and Local Government, announced that the government would:
- abolish the sale of new houses on a leasehold basis
- reduce ground rents for new leases to zero
- require that management information needed on a sale to be forthcoming within 15 working days for no more than £200
- adjust Help to Buy rules to ensure funding isn’t available for houses sold on a leasehold basis and house buyers wrongly acquiring on a leasehold basis are to be given the right to acquire the freehold at no extra cost. The original plan to reduce ground rents to a cap of £10 per year has been dropped. A date for the legislation hasn’t been set.
The government then published its response to the above consultation providing more detail around James Brokenshire’s announcements:
Ban on sale of houses via leasehold
The ban will come into effect as soon as the legislation commences, as opposed to there being any transitional period. It will affect the sale of a house on a long lease out of the freehold or from a leasehold interest acquired since 22 December 2017.
House leases of up to 21 years will not be caught by the ban. Exemptions from the ban include shared ownership properties, community led housing, amenable National Trust sites and accepted Crown properties on the Crown Estate and canvassed previously. In addition retirement properties and home reversion plans (equity release schemes falling within certain criteria) are to be exempt.
While developers who receive their leasehold interest by 21 December won’t be caught they may find there is reduced appetite as the government’s proposals are reported as having already had a fundamental impact on the housing market (since being announced the sale of leasehold houses has fallen from 11% to 2%).
Option agreements entered into before December 2017 will be subject to the ban on the basis those with the benefit of the option can choose not to exercise it.
The gatekeeper for compliance will be the Land Registry; the applicant for title will have to declare that a new house lease is compliant with the legislation. If that proves to be wrong then the owner of the house at the time will be able to upgrade to a freehold interest at zero cost. Civil penalties might be introduced for breaches of the ban.
Problems enforcing positive covenants against one freeholder by another haven’t been dealt with; instead the government says it will respond to the Law Commission’s report in this regard. They have confirmed an intention to allow newly created freeholds to be included within the existing estate management scheme (currently they only benefit freeholds acquired via the enfranchisement process).
The definition of a house for this purpose remains to be finalised but it will be a built structure with a significant degree of permanence that is a single dwelling or unit of living accommodation that is either a self-contained building or part of one. This reflects the definition used in the collective enfranchisement legislation and so implies that the test will be interpreted in a similar way so requiring a clear vertical division and the ability for the relevant parts to be capable of being redeveloped independently from adjoining premises.
As a consequence a building that presents as a “house” but which in fact has a material overhang of another structure such as a flat below or another “house” beside may not fall within the definition. That leaves room for developers to design “houses” to fall outside this definition and so the ban.
Reduction of ground rent in new leases
Again there is to be no transition period on the basis sufficient warning of the proposals has been given.
Exemptions are available for community led housing schemes, retirement property, mixed use leases and home reversion plans. Shared ownership leases will not be exempt but this only affects the ability to charge a ground rent on top of the rent payable on the landlord’s retained equity share as opposed to that rent also being prohibited.
As regards voluntary lease extensions for existing properties, the government confirms that ground rents need not be removed when say a flat lease is extended. However, the parties will only be able to retain the existing ground rent arrangements during the original lease term. They won’t be able to provide for a continuing ground rent for the extended element.
Ground rent above the zero value where applicable will not be enforceable save where an exemption applies. Where it is paid in error , the tenant will be able to obtain a refund plus reimbursement of costs incurred with no drop dead date to make this application. In addition, courts would have the power to impose a civil fine of up to £5,000 per property on freeholders charging ground rent in breach.
Service charge protection for freeholders
House freeholders are to be given rights to challenge the reasonableness of estate rent charges in the same way as flat owners can currently challenge their service charge.
Freeholders will have the ability to apply to the First Tier Tribunal to appoint a manager to manage the provision of services covered by that estate rent charge.
Management information needed on sale
A maximum fee of £200 plus VAT can be charged to produce replies to the industry standard form LPE1 in this regard. The charge within that cap must be reasonable. Up to £50 plus VAT may be charged to update replies previously given. Fees are planned to increase in line with inflation.
The ban on the sale of houses on a leasehold basis will be old news for developers. The reduction in sales of leasehold houses to 2% in 2019 evidences this.
Developers who had to factor into their bid the benefit of the ground rent income stream that would flow from being able to sell the houses on a leasehold basis since 22 December 2017 will have lost out in that regard but then they were on notice.
The reduction in ground rents payable under new leases has been well trailed but some developers may lose out significantly having been compelled to factor in this income to their bid for sites made before the government announced its intentions in this regard.
Those who acquired a leasehold interest before December 2017 will no doubt lose out, as while they are not caught by the ban the market may not stomach them selling the property on a leasehold basis now with the ground rent income that might have generated they were perhaps compelled to reflect in their bid to be successful.
Those with the benefit of options entered into before December 2017 may have a difficult decision to make. Some renegotiation may ensue.
The positive covenants issue needs to be dealt with urgently; the extension of existing estate management schemes won’t help every development.
The definition of a house may leave it open for developers to design their way round the prohibition but there is a big question mark now as to the appetite in the market for a leasehold “house” even where it can still be sold on that basis.
Owners of freehold portfolios may find the value of their interest adversely affected as they are no longer able to charge a ground rent in respect of any extended lease term they may agree. Perversely this may operate against leaseholder’s interests as often a flat owner will only think about extending the lease when it comes up as an issue at the point of sale at which stage they don’t have time to go through the statutory process.
The ability to create a future ground rent income stream was an incentive for a landlord to entertain negotiations for a voluntary lease extension. That has now fallen away and so landlords are bound to increase the premium demand to compensate for the loss of respective ground rent income they might otherwise have negotiated for. In short, flat owners might find the premium demanded is much higher than before or that the landlords aren’t interested in negotiating at all leaving them with a difficult or even abortive sale.
Managing agents’ fee recovery will be adversely affected by the cap on fees. It is common to come across fees of £400 plus VAT or more in the current market and a charge of £200 plus VAT to update a set of management replies. The loss of that income may push up their charges in other areas such as dealing with block management for resident’s management companies, so there is a potential unintended consequence there.
Of course, the government may not legislate at all or in line with the proposals particularly if there is a change of government so it remains a case of “watch this space”.