Have your say: the Government is consulting to tackle unfair practices in the residential leasehold market

Controversies surrounding escalating ground rents in long leasehold residential properties have received significant press in recent months. We discussed this, and other traps for the unwary, in a previous Law Now. The Government has now issued a Consultation Paper with a view to taking action.

The title of the Consultation Paper is “tackling unfair practices in the leasehold market”. Clearly the Government is of the view that current practices are unfair and that action needs to be taken to redress the balance of power between landlords and tenants.

Although a lot of the initial publicity has focused on the proposals in relation to leasehold houses, the potential implications of the Consultation Paper are much broader. They affect investors in the residential ground rent sector as well as residential developers and the tenants themselves.

The Department for Communities and Local Government (DCLG) is seeking views on a number of issues and, in particular, on the following:

Limiting the amount and increase of ground rents on all new residential leases over 21 years

The proposal in the Consultation Paper with the widest implication is the potential limit on the amount of ground rent that can be charged on residential leases (whether houses or flats).

The Government believes that, in recent years, the cost of ground rents has risen significantly. The Consultation Paper states that developers are also increasingly selling leasehold properties with shorter ground rent review periods, often every ten years, which adds to the unfairness.

Currently, the law in England does not limit the level of ground rent payable in a residential lease and there is no requirement for the ground rent to be ‘reasonable’ or at market value. The Government is proposing to limit ground rents in new leases to a peppercorn (effectively nil) with exceptions for housing association and local authority tenants exercising the Right to Buy. This peppercorn limit would apply throughout the duration of the lease.

The Government also wants to explore as an alternative means by which fairer ground rents might be achieved. Perhaps, following the approach of some building societies who will only lend where there is a maximum acceptable starting ground rent and index-linked increases.

The Paper also recognises that as the new rules will only apply to new leases, existing leaseholders would still be faced with current “onerous” ground rent arrangements and views are invited on the steps that can be taken to assist these leaseholders.

Limiting the sale of new build leasehold houses

The Consultation Paper expresses the view that where houses are sold on a freehold basis the Government would expect a higher value to be paid by the purchaser than on a sale on a leasehold basis. The concern is that this “leasehold discount” is not always been passed on to the consumer so that the sale of leasehold houses represents poor value for home buyers as consumers.

The Government also believes that this discount is outweighed by the future costs incurred by the house purchaser in paying a continually increasing ground rent, potential fees payable for permissions to make alterations and the cost of extending the lease or buying the freehold.

Exempting leaseholders potentially subject to ‘Ground 8’ possession orders

Where ground rents exceed £1,000 per year in Greater London and £250 elsewhere in England, leases are classed as an assured tenancy under the Housing Act 1988 and a landlord can issue possession proceedings. See our previous Law Now on this topic.

The Government intends to amend the Housing Act 1988 to rectify this unintended consequence of the legislation, highlighting that landlords of tenants who own properties under long leases should be relying on the remedies set out in those leases to recover arrears and that forfeiture (rather than simple possession proceedings) should be the ultimate remedy.

Providing freeholders on residential estates with equivalent rights to challenge service charges

When a private estate includes both freehold and leasehold flats, the leaseholders can challenge the reasonableness of service charges through the First-tier Tribunal (Property Chamber). Even though the freeholders may be paying for exactly the same services as the leaseholders, they do not have a right to challenge those costs through the tribunal.

The Government wants to promote appropriate rights for all freeholders living on private estates to challenge the reasonableness of service charges.

Future issues: areas for future leasehold reform

The primary driver behind this initiative is tackling perceived abuse in relation to the leasehold market. Therefore, in addition to the specific questions raised and the proposals published, the Government is also inviting comment on what further areas of leasehold reform should be prioritised and why.

Some things to consider

The Consultation Paper is focusing primarily on protecting the consumer. The concern is clearly that consumers have been misled in the past particularly in relation to ground rent arrangements and the long-term implications in relation to leasehold houses.

Some of the Government proposals will be fairly uncontroversial (for example, in relation to service charges and “Ground 8”), but others could potentially have wide-ranging implications. In particular the consequences that could arise as a result of limiting ground rents to a peppercorn include:

  • The most obvious impact of fixing ground rents at a peppercorn is that there is no income stream. There is therefore nothing for investors to invest in going forward.
  • Bearing in mind the housing crisis in the UK, the Government is keen to avoid doing anything that may potentially adversely affect delivery of housing. Will these proposals have an impact on supply? Developers who have already acquired land, making assumptions as to the values that can be generated both by individual house/apartment sales, and ground rent disposals may have to reassess viability. If there is no reversionary value going forward, how are developers going to make up the shortfall? Will consumers be asked to pay more?
  • When assessing financial viability for the purposes of affordable housing, developers will have included a potential ground rent value. If this value is being removed, does this mean the developers would want to reopen affordable housing viability assessments?
  • To what extent is the house building industry prepared to set aside significant sums of money to support existing leaseholders with onerous ground rent arrangements? If they are not should the tax payer pay? How in practice would any scheme operate? Refund the inflated rent on an ongoing basis? One-off compensation payment?
  • What is the impact on the value of existing residential reversionary portfolios even if they are ring-fenced and are not affected by the changes to the law? Will this asset class still be seen as an attractive investment?
  • The range of investors in residential ground rent portfolios is broad. It includes pension funds and other institutional investors as well as the public sector. For example, local authorities and affordable housing providers had been able to use ground lease values within their estates as a way of generating income to fund other activities. If this source of income/capital value is no longer available what alternative sources will there be?
  • And in terms of detail, if the law changes for new leases only how does this affect existing contractual arrangements to pre-sell the ground rents in a particular scheme? Will they simply become void?

Have your say

You have until midnight on 19 September 2017 to have your say.

Responses can be made online at www.surveymoneky.co.uk/r/leaseholdhouses or in writing to LeaseholdHousesConsultation@communities.gsi.gov.uk