In an announcement that has reportedly sent house builder shares sliding, the government has cemented its resolve to “crack down on leasehold practices” – described by Secretary of State for Communities and Local Government, Sajid Javid, as “feudal” – by banning leaseholds for “almost all” new build houses and setting ground rents to zero on new long leases.
How Will the Market Change?
• No new build leasehold houses
• Ground rents on new residential long leases will be set at zero – for both houses and flats
• Giving freeholders equivalent rights to leaseholders to enable them to challenge unfair estate service charges
• Supporting existing leaseholders by:
– Making the process of buying the freehold or extending a lease “easier, faster and cheaper”
– Offering clearer guidance on remedies already available
– Carrying out an internal review of existing advice to leaseholders
There are few exceptions.
New leasehold homes will only be permitted where they are “necessary” – shared ownership being one example. The retirement homes sector has been suggested as one that ought to attract an exemption on the basis that the arrangements by which such homes are let do not threaten the viability of the market. Some Community Land Trusts may also be considered for an exemption. However, the government has made it very clear in its response to its recent consultation, “Tackling unfair practices in the leasehold market”, that it considers the arguments for selling leasehold, rather than freehold, interests in houses can be effectively dealt with using alternative approaches to issues such as the upkeep of shared space and services.
Why the Change?
There has been a growing trend among house builders to sell new homes on terms that allow them to charge ground rents, the most controversial of which double every 10 years for the first 50 years, as well as charge for maintenance of shared open spaces with associated “administration” fees. This trend has seen more and more publicity in recent times, with campaigners such as the Leasehold Knowledge Partnership highlighting the plight of tenants – a cause championed by Mr. Javid.
As Drastic a Change as It Looks, or Will We See Further Exceptions?
There is no doubt that this move has the interests of individual homeowners at its heart. What is perceived as the unacceptable exploitation of homebuyers may, however, have significant implications well beyond what is likely to be a popular decision among the electorate. The message from the housebuilding industry is that we will see fewer homes being built and those that are will be more expensive to buy.
This is a brave, if radical, move, as ground rents can have a positive benefit for the wider economy. Used appropriately, ground rents establish quantified, stable, determinable income over long time horizons from a diversified creditor base that supports wider financial instruments, such as annuities.
With the indication that government will continue to work with the industry to identify justification for further limited exemptions, this discussion is likely to be far from over.