The government has issued a consultation paper 'Tackling unfair practices in the leasehold market', proposing, among other ideas, restrictions on the sale of new-build leasehold houses.
The government's Housing White Paper published in February this year highlighted the government's aim to improve consumer choice in the leasehold sector and committed to consult on a range of measures to tackle what it called unfair and unreasonable abuses of leasehold. This week's consultation paper, 'Tackling unfair practices in the leasehold market', is one of the outcomes. It contains a number of proposals for reforming the sale of properties on long leases and adding protections to existing leasehold owners.
There is an extremely short consultation period of only eight weeks. The last date for submitting responses is Tuesday 19 September 2017. A copy of the consultation paper can be viewed here.
These proposals relate to England only
Outlawing the sale of new-build leasehold houses
The government is concerned that new houses are being sold on a leasehold basis to create an income stream from the ground rent, or to generate additional income from the sale of the freehold title. The government thinks that this represents poor value for consumers.
Developers and landowners argue that restricting their ability to sell freehold interests to third party investors will result in increased house prices, in order to compensate developers for selling the freehold interest to the purchaser, and in addition will reduce choice. The government is not convinced of these arguments. The consultation paper therefore asks respondents what restrictions should apply on the sale of houses on long leasehold terms. Its starting point is that houses should not be sold on long leases unless there is a good reason to do so.
One point that the consultation does not directly address is that houses are often sold on a leasehold basis where they are on a private estate and they are structurally linked in such a manner as to require joint maintenance, such as an open plan loft space for bats, or underground car parking. Where house owners are required to contribute to this type of building service charge, the simplest and most cost-effective way of ensuring the proper maintenance of the structure and obliging successive owners to pay the service charges is to use a leasehold structure. There are other possibilities, but until the Government implements the Law Commission's proposals for the reform of easements and covenants, they will remain more complex and increase the costs of selling property. We propose to raise these issues when we respond to the consultation.
Ground rents - in leases of houses and flats
For both leasehold houses and flats, the tenant pays a ground rent. In the past these were typically nominal sums of a few pounds, but in recent years these have tended to be significant sums. The consultation paper contains an example of a property costing £200,000 with a ground rent that begins at £295 a year and increases to £9,440 after 50 years. Often the ground rent in a modern lease will double on a periodic basis, perhaps every ten years. The higher the ground rent, the more it would cost the leaseholder to extend their lease or to acquire the freehold title to the property under the Leasehold Reform Act 1967.
The government therefore wants to introduce measures to limit ground rents in new leases. One option proposed in the consultation document is that ground rents should start at, and remain at, a peppercorn (which is effectively no rent at all). As an alternative, the government says that it want to explore measures by which fairer ground rents might be achieved. The recent Nationwide guidelines for lending on leasehold houses are used as an example of how this could be achieved (Nationwide will lend on new-build leasehold properties only where the ground rent represents no more than 0.1% of the property value at the start of the lease, and any rent reviews must be on the basis of an objective index such as RPI). This proposal would affect leases of flats as well as leases of houses.
The proposed changes would only affect leases granted after the new rules come into effect. The consultation invites views on what steps could be taken to improve the position of existing owners of leases where the ground rent can escalate. No suggestions for change are included in the consultation itself, however.
Addressing residential service charges on estates
Residential leaseholders of dwellings (both flats and houses) benefit from a great deal of statutory protection in relation to the service charges that they have to pay. The service charges must be reasonable, and the leaseholders have the right to be consulted on future repairs and maintenance costs, and to take over management of their properties even where there is no fault on the part of the landlord.
Freehold owners of houses on a residential estate may similarly be obliged to pay an estate service charge for the maintenance of estate grounds, roads and external decoration. Unlike leaseholders, they do not enjoy any statutory rights to challenge the reasonableness of service charges. The government is consulting on providing freeholders with equivalent rights to those enjoyed by leaseholders.
The government proposes that long leaseholds of residential property should not be capable of being classified as assured tenancies, as can occur now in certain circumstances. This is a welcome proposal that addresses an unintended anomaly in the law.
The paper concludes with an indication that this may not be the end of the government's intervening in the residential leasehold sector with the aim of ensuring 'transparency and fairness'. It appears that, as part of its 13th programme of law reform, the Law Commission will be carrying out a wide-ranging project looking at, among other issues, leasehold terms and enfranchisement, investigating how managing agents operate and - most intriguing of all - 'improving commonhold'. Readers with long memories may remember the introduction of commonhold in 2002. This form of property ownership was intended to allow leasehold owners to own their own flats and, at the same time, a share in the company ('commonhold association') that owns the entire block - replicating the concept of a tenants' management company. For a variety of reasons, commonhold never found favour with residential developers. Perhaps this time around it will be different
Responding to the consultation
Some of the changes proposed by the government will be welcomed by homeowners but may prove to be contentious with developers. This makes it all the more important that organisations and individuals affected by the proposals should respond to the consultation. As mentioned above, this is a very short consultation lasting only eight weeks (at least five of which fall within the summer holiday period). The last date for responding to the consultation is Tuesday 19 September 2017.
You can download a copy of the consultation paper here.