In the week before Christmas, the Government announced a range of proposals that promise to transform the manner in which new houses and flats are sold.
This announcement followed a consultation earlier this year on so-called "unfair leasehold practices". The proposals will apply to properties in England only, and so will not apply to properties in other parts of the United Kingdom.
Broadly, the key proposals are:
- with certain unspecified exceptions, developers will no longer be permitted to sell new houses on a leasehold basis;
- leases of any new flats, and leases of any new houses that are still permitted to be sold on a leasehold basis, will have to reserve a ground rent of a peppercorn (meaning no rent at all), except where the property is sold under a shared ownership scheme;
- simplification of various other provisions relating to leasehold property, with the Law Commission having been asked to consider how commonhold can be made to work as originally intended.
The proposals will be welcomed by future homeowners but are likely to be less attractive to developers and investors. It is currently unclear to what extent the changes will benefit existing leaseholders, and what the exceptions to the rules on leasehold houses are going to be.
The remainder of this article explains the Government's proposals in more detail.
Ban on new leasehold houses
With certain exceptions, new residential long leases of houses will be outlawed. This will apply to new-build houses and also to existing freehold houses. Where land is currently subject to a lease, so that it is not possible to sell freehold houses, developers will be able to build and sell leasehold houses. However, the response to the consultation states that this will not be permitted where the developer's lease is created after 21 December 2017 (the date of the Government's response). It is unclear how this will apply to developments in the future, where the developer is able to obtain only a leasehold interest in the site for some reason. Much will depend upon how "house" is defined in the new legislation.
The Government accepts that there will need to be exceptions to the basic prohibition, in particular to continue to permit shared ownership schemes, but other exceptions may also be provided. This appears to be one of the key areas still to be discussed between the Government and developers. The current state of the law means that leasehold schemes are particularly suitable for use in developments that include common areas and services, to be paid for by way of a service charge. However, the Government has said that it is planning to modernise the law in this area (see "Law reform" below).
Zero ground rents on new residential leases
Ground rents on new leases of houses and flats will be set at a peppercorn (zero financial value). The Government will make sure that these proposals do not interfere with shared ownership schemes, which are specifically designed to support affordable ownership.
Existing leasehold houses
The proposals to outlaw leases of houses and to require zero ground rents will not apply to existing leases of houses or flats. The Government will not legislate to cap these rents. Instead, it wants to see existing compensation schemes established by developers extended to all those with onerous ground rents and for better information to be provided about the rights to redress that homeowners have.
Extending rights to enfranchise
It will be easier for leaseholders to exercise their right to buy their freehold or extend their leases. Priority will be given to reforming the system for leases of houses, but the changes will extend to leases of flats. The proposals include the possibility of giving leasehold owners of houses a right of first refusal, if their landlords want to sell.
To make the process easier, the Government will consult on introducing a prescribed formula for determining the amount that the leaseholder pays to enfranchise or extend the lease that provides fair compensation to the landlord, while also helping leaseholders avoid incurring additional court costs in the enfranchisement or lease extension process.
To reduce the need to extend leases, a minimum length of term for long residential leases may be introduced.
Assured tenancy trap
Where ground rents of residential leases exceed £250 per year, or £1,000 per year in London, a leaseholder is classed as an assured tenant. This means, for even small sums of arrears, leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent. The Government will take action to address this loophole and ensure that leaseholders are not subject to unfair possession orders.
Residential management charges on freehold estates
Leasehold owners of houses and flats have the benefit of extensive controls over the amount they pay for services and the quality of the services provided, under the Landlord and Tenant Act 1985. However, freehold owners of houses on managed estates have no protection. New legislation will ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed-use estate will have equivalent rights to those that leaseholders already have to challenge the reasonableness of service charges.
With the ban on the grant of new leases of houses, the Government will respond to the Law Commission's proposals on easements and covenants to ensure that it is easier for developers to set up schemes for the maintenance of common parts of freehold developments, and payment of service charge. There will also be a review of the commonhold legislation to see if it can be kick-started. When introduced in 2002, commonhold was heralded as the solution for many of the problems with leasehold ownership, but it has been used in only a handful of developments since then.
Timetable for change
The Government's proposals do not contain any timetable. Some of the proposals will be introduced "as soon as Parliamentary time allows". Others will involve further consultation and reviews by the Law Commission. There is, therefore, little clarity about when the proposed reforms will take effect.
Change is disruptive and an uncertain timetable for change, even more so. It will be interesting to see how the residential market adjusts in advance of legislation, particularly as buyers and their lenders may become increasingly reluctant to accept new houses sold on a leasehold basis or properties sold subject to significant ground rents that are expected, in the not too distant future, to be outlawed. The impact of the proposals on sales and purchases of existing second-hand leasehold properties is another unknown.
In addition, developers who are setting up new residential schemes will be looking carefully at the proposals to see how they will affect the structuring of their new developments. They will justifiably be reluctant to cease using leasehold for schemes of new houses that share common areas and common services until the Law Commission's proposals on easements and covenants have actually been implemented.