Property analysis: The Ministry of Housing, Communities and Local Government (MHCLG) has announced plans to stop the practice of leaseholds, meaning all new-build houses will be sold as freehold. Timothy Waitt, partner at Anthony Gold, considers recent government proposals which aim to tackle unfair leasehold practices

Original news

New-build houses to be sold as freehold, LNB News 27/06/2019 81

MHCLG has announced plans that all new-build houses will be sold as freehold, unless there are exceptional circumstances, in efforts to combat unfair leasehold practices and prevent future home-owners from being ‘trapped in exploitative arrangements’. The Secretary of State has also asked Homes England to renegotiate help to buy contracts so that the selling of new leasehold houses will be ruled out. Other proposals include plans for deposit passporting and new garden communities, as well as consulting on the creation of a New Homes Ombudsman, with the consultation closing on 22 August 2019.

In the below three proposals, what is the issue being addressed, the measure proposed and is the proposal likely to address the issue or will more need to be done?

All new houses to be sold on freehold basis unless there are exceptional circumstances—ending unscrupulous practice of unnecessary leaseholds and reducing ground rents on new leases to £0— preventing leaseholders being charged soaring fees for which they receive zero benefit

In recent years there has been a huge increase in the sale of leasehold houses, creating a relationship of landlord and tenant between the buyer and freeholder. This applies particularly to newly built homes where developers have sold the leasehold houses and then the freehold, thus getting additional income.

To increase the value of the freehold, the leases have been loaded down with doubling ground rents and consent fees. These charge the leaseholder for routine steps of home ownership, for example notification of re-mortgaging or alterations. These issues can relate to all leaseholds—both flats and houses.

A doubling rent can reach eye watering levels over the life of a lease and that has led to properties becoming unsaleable and un-mortgageable. One example let to a ground rent reaching £69trn—30 times the UK GDP.

Buyers understandably feel that they have been mis-sold. They had not appreciated the impact of the very significant difference between being a leaseholder and freeholder. Nor had the impact of doubling ground rents and fees sunk in. This is the ‘Leasehold Scandal’.

The government has long said it will take action—but it is proceeding slowly.

Now it is announcing (again) that it will legislate to stop the creation of leasehold houses, unless there are exceptional circumstances. Second, the government plans to limit the freehold value by making ground rent payment provisions unenforceable.

These are welcome proposals to prevent future problems, but they do nothing for those trapped in onerous lease provisions with unsellable properties. See below regarding the Ground Rents (Leasehold Properties) Bill 2019 for more on measures to assist existing leaseholders.

Introducing a new time limit of 15 working days and a maximum fee of £200 to make the home buying process quicker, easier and cheaper

To sell a leasehold property, the buyer must have information on the management of the property, ground rent and service charges. Without it the property cannot be sold. This information comes from the freeholder or their managing agents. There are two issues—the fees charged and the time it takes to be provided.

The government has decided to set a maximum fee of £200 for the provision of the pack in the LPE1 form and £50 for updating, as well as a deadline of 15 working days. This sounds good, but how will it be enforced?

The government says it will require all freeholders to be part of a redress scheme to enable the leaseholder to complain. This is positive, but it is hard to see how this provision will be enforceable and effective.

The new Ground Rents (Leasehold Properties) Bill 2019 has just been introduced in Parliament. What will this Bill do and why is it necessary? What will be the implications of this Bill on property developers and landlords?

The Ground Rents (Leasehold Properties) Bill was introduced to parliament on 25 June 2019 and is in its infancy— there is no drafted Bill yet and the statement to parliament is limited. It is clearly a reaction to the positive statements by the government regarding tackling the Leasehold Scandal.

The Bill proposes first to deal with unsaleable properties due to ground rents, by requiring freeholders to grant a variation. It also proposes a cap of £250 or 0.1% of the property value on ground rents. Finally, it suggests forcing developers to pay the legal costs of sorting out the problems.

Importantly the Bill provides remedy to existing leaseholders trapped with unsaleable properties and increasing ground rents. If passed it would be of huge benefit to leaseholders. For property developers this will impact the value of freehold sold. Some landlords (freeholders) may face an immediate reduction in the rent, but all will lose future income.

However, the Bill is likely to flounder due to lack of parliamentary time, unless the government supports it.

Why is there a need for a New Homes Ombudsman and what will they do? Will this be enough to remedy current issues?

There are serious issues with the quality of construction of newly built homes and developers’ effectiveness at addressing the problems.

In the last House Builders Federation consumer satisfaction report 99% of buyers reported problems, 26% reported more than 16 separate issues and 34% said there were more problems than expected.

The nature of the problems will vary hugely—from cosmetic to major structural problems. More than half of the respondents to a Shelter survey, reported in the Guardian, discovered ‘major faults’. In the year to March 2019 some 139,000 new-build dwellings were constructed in the private sector, plus 30,000 in the public sector. These statistics demonstrate a very real problem, affecting thousands of people.

Faced with such issues, buyers are left to complain to their builder. Many report problems and there are no effective measures to force the builder to address the issues, without recourse to the courts. Construction cases are complex and expensive and accordingly buyers are left in a very difficult position.

The government consulted on a New Homes Ombudsman in autumn 2017 and agreed to implement the Ombudsman in October 2018. Finally, it is now consulting on the detail of the proposals for an Ombudsman.

The Ombudsman will consider and investigate complaints which have not been resolved via the developers’ existing complaints process. They can then make a decision, recommending redress as appropriate. It is also hoped that they will be able to issue reports naming and shaming on major failings.

Much of the work of the Ombudsman will be to assess the complaint against a Code of Practice. What this code covers, and therefore the scope of the Ombudsman will be crucial to its effectiveness. How such a code will effectively deal with construction defects remains to be seen. Construction disputes are complex and document heavy. Will the Ombudsman have sufficient resources to deal with this?

Finally, new homes are complex structures and there is a huge knowledge imbalance between consumers and developers. How will the Ombudsman tackle this? Will they employ construction professionals to assist? Or will they be forced to rely on the developer, its workmen and engineers?

The Ombudsman will doubtless help with more straightforward disputes, but whether it can adequately tackle complex construction defects is another matter.

Are these proposals welcome in the current context of the housing reform? What next?

These proposals are welcome, but that is all they are and until legislation is introduced nothing changes. The government is moving forward slowly, having consulted on these issues during 2017. There appears to be little urgency in tackling these issues, which have a huge impact on homeowners.

It remains to be seen whether the new Conservative leader will proceed with these changes. It seems likely they will— but when? Brexit of course continues to limit parliamentary time and will also delay matters.

This article was first published on Lexis®PSL Property on 9 July 2019. Click for a free trial of Lexis®PSL