Should developers be allowed to sell leasehold houses instead of "traditional" freehold houses? Should the level of ground rents in residential leases and any increases in ground rent during the term of a lease be restricted? Is anything more than a nominal ground rent always unfair? The government is consulting on these questions and more and the proposals could lead to a radical shake up of residential leasehold law. David Horan explains how.
Following a number of recent reports involving leasehold properties, on 25 July 2017 the Rt Hon Sajid Javid MP, Secretary of State for Communities and Local Government, issued a consultation paper entitled "Tackling Unfair Practices in the Leasehold Market" with the aim of addressing particular issues. The consultation closed on 19 September 2017 and the proposals are potentially very radical.
We highlighted some of the issues back in February 2016, when we blogged about a flat in Solihull. The lease had an initial annual ground rent of 250, which doubled every 10 years. By the end of the 160 year term, the annual ground rent would be over 8m.
Earlier this year we blogged about Nationwide's announcement that it would no longer lend on new build residential leasehold properties if the amount of ground rent was more than 0.1% of the purchase price. Nationwide also suggested that ground rent increases during the term should be linked to an index, such as the Retail Prices Index (RPI), and made clear that doubling ground rent clauses were unacceptable.
The consultation paper confirms that the government is minded to limit ground rents in new leases to a peppercorn (i.e. nothing), subject to certain exceptions. However, the consultation also seeks views on whether that is appropriate, or whether a more "reasonable" ground rent regime could be introduced. This covers not only the initial ground rent payable but also the basis for any increases during the term of the lease.
For example, Nationwide's suggestion that ground rent increases could be linked to RPI increases. If the government limits ground rents to a peppercorn, that will reduce the value of future ground rent investments but if the government index links ground rents then the impact of the reforms may be more muted as lenders are now aware of the dangers of punitive ground rents.
The consultation also covers a number of other leasehold issues including whether the government should limit the sale of new leasehold houses (as opposed to flats). This will be of interest to developers proposing to build houses on land in which they themselves only hold a leasehold interest. Developers may have been able to acquire the freehold of the land at the outset, but frequently that is not possible, particularly on complex sites. In those circumstances, we would hope any future legislation will include appropriate exceptions so as to make sure the land can still be developed.
The government's consultation paper can be found at gov.uk under the consultation's title: Tackling Unfair Practices in the Leasehold Market.