Government responds to its consultation on leasehold reform

Last week saw a volley of government announcements for the private rented sector and investors in leasehold residential property. At the Chartered Institute of Housing Conference on 27 June, Prime Minister Theresa May and Communities Secretary James Brokenshire announced "bold action", as soon as parliamentary time allows, to empower tenants and tackle perceived inequality in the private rented sector between landlords and tenants. On the same day, the government published its response to the consultation on "Implementing reforms to the leasehold system in England".

In October 2018, the government opened its consultation on reforms to the leasehold system in England, focussing on what it described as the unjustified use of leasehold for new build houses, and tackling "pernicious" ground rents with a proposal to implement an annual cap.

At last week's conference, the Prime Minister announced that an action plan and implementation document will be published in September, "enhancing the tenant's rights" and the Communities Secretary promised measures to "confront unfairness in the leasehold market".

The promised reforms include the main legislative changes that were foreshadowed by the consultation: banning the grant of new leases of houses; and imposing penalties on landlords who are slow to provide the information leaseholders need when they are looking to sell their properties.

As for the future of residential ground rents, the Communities Secretary has announced that all ground rents for new leases will be reduced to a peppercorn (that is no financial value). Ahead of the consultation in the Autumn, the government had contemplated a £10 cap, but it appears that consumer opinion has persuaded the Communities Secretary to revert to the government's original proposal, which was effectively to ban ground rents altogether on the basis that they have "no clear benefit to consumers". Leaving aside the question of whether this outright ban is a proportionate response to the unfairness of a specific category of ground rents (those that increase exponentially) it seems that it won't be long before investing in ground rent income is a thing of the past.

The highlights of the government's response to the consultation replies are:

  • A ban on ground rents of any value, for all new leases, with limited exceptions for retirement properties and community-led developments;
  • A ban on selling new houses on a leasehold basis (with a house being defined as single dwellings, and self-contained buildings or parts of buildings, structurally detached or vertically divided), with exceptions for shared ownership and community-led developments, retirement living and home-purchase schemes;
  • A right for any tenant mis-sold a lease of a new house (that is, after the reforms become law), to acquire the freehold for no premium;
  • A statutory right of first refusal for leasehold owners of houses whose landlord wishes to sell their freehold interest (echoing the existing right for tenants of flats);
  • Financial penalties for landlords who take more than 15 working days to provide tenants with the vital information they need to be able to sell their lease; and
  • Measures seeking to promote more fairness in the way that maintenance charges for communal areas are charged to freeholders and leaseholders.

In spite of concerns within the housing and development sectors, the ban on ground rents, and on new leases of houses will take effect immediately when legislation is passed, with only owners of leasehold land as at December 2017 allowed to continue to develop leasehold houses on their land. The government has decided that by the time the legislation comes into effect the industry will have had plenty of time to adjust. Legislation has been promised as soon as parliamentary time allows which, bearing in mind how busy parliament is at the moment, may be a few years away.

There seems little doubt that for a large number of investors and developers these legislative changes will have a significant effect on their developments and investments. Time will tell how the industry will adapt to these changes, and how it will affect the future supply of much needed housing stock.