There have been a number of recent headlines about the unfairness of the leasehold property market, particularly in relation to the sale of new build houses. Headlines have referred to ground rents on properties worth £200,000 rising from £295 to £9,500 per year over a 50-year period, making the property almost unsaleable. This is quite rightly a concern for the Government, which has now published a consultation paper "Tackling unfair practices in the leasehold market", seeking views on leasehold reform in an aim to "deliver a fairer, more transparent system for homebuyers".
There has been an increasing trend in recent years for new build houses to be sold on a leasehold basis, especially in the North of England. The criticism of this is that it is done solely to create an income stream from ground rent or to generate additional income from the sale of the freehold interest after completion of the lease.
It is estimated that there were 1.2 million leasehold houses in the owner occupied and private rented sectors in 2014/2015. The problem lies with the landlords including onerous charges and what is seen as unreasonable rises in ground rents on properties where the tenant has already paid a substantial premium.
The Government is consulting on limiting the sale of new build leasehold houses and one proposal is that going forward new build houses must be sold freehold. The Government is also considering limiting the reservation and increase of ground rent on all new residential leases over 21 years. One possibility is that ground rents start and remain at a peppercorn throughout the course of the lease. Another is that the ground rent be limited to a "reasonable" figure, although we do not know at this stage how that would be calculated.
Whilst the possible introduction of measures to prevent abuse of the leasehold structure by unscrupulous landlords is welcome, it is important that the benefits of its legitimate use are recognised.
Away from the headlines, many tenants of houses are happy with the leasehold system. The leasehold system enables a landlord of an estate to control the way an estate looks and develops. It also offers benefits to the tenants.
Owners on a new build estate often value the homogeneous nature of the estate and want to maintain that. Owners are willing to pay a premium for living on an estate that looks nice. By selling properties leasehold, the landlord can ensure that the tenants keep the exterior of their properties decorated and in good repair and condition, keep tidy gardens and control parking. For example, many people do not want white vans or campervans parked outside and a leasehold structure can prevent this. Developers can also control future alterations to the properties and development through a leasehold structure, which many tenants want. A leasehold structure enables good estate management, which generally benefits all of the tenants who can ask the landlord to enforce covenants.
And the leasehold structure has created and maintained some of our best loved urban landscapes. London’s Mayfair or St James’s would simply not exist in their current form without it.
Since there are clearly advantages to the leasehold system, one way of dealing with the concerns might be to allow new build houses to be sold on a leasehold basis but to control the level of ground rents. This would address the issues raised by unscrupulous developers simply trying to create a future income stream but would not ban the system altogether. It would enable a good landlord to put in place controls on the way the properties on the estate are used, developed and looked after for the benefit of the other tenants, which is often welcome, especially on new estates.
This article first appeared in PrimeResi