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Government confronts unfair practices in the leasehold market

We have seen a significant amount of publicity recently surrounding the sale of leasehold houses and the imposition of significant ground rents. Such has been the negative publicity that the Conservative party promised in its 2017 election manifesto to "crack down on unfair practices in leasehold" and followed up after the election by issuing a consultation paper on entitled ‘Tackling unfair practices in the leasehold market’.

The consultation, which ran until 19 September 2017, has since received over 6,000 responses from freeholders, tenants and developers, signifying the high interest in the issue.

The government’s response to the consultation has proposed the following changes:

Leasehold ban

The sale of new leases on residential houses (no mention of flats) will no longer be permitted except where this is necessary, for example shared ownership or to preserve buildings of architectural or historical importance. This will be applied to new and existing freehold houses but not to developments already being constructed where leases have already been granted at the date of the consultation response.

Help to Buy

The government wishes to strongly discourage the use of Help to Buy equity loans for the purchase of leasehold houses in advance of any new legislation.

Ground rents and lease extensions

Ground rents for new leases of houses and flats will be reserved to zero or a peppercorn (meaning no rent at all) will be applied to leasehold properties.

Existing leasehold properties

There will be reforms to make purchasing a freehold or extending a lease much simpler, faster and cheaper. The sale of properties on a leasehold basis could still be permitted but there are proposals for a simplified formula for calculating leasehold buyouts and lease extensions, which is predicted to be in place by the end of 2018. There will be a further consultation on this. Additionally, leasehold owners could be given the right of first refusal, if the landlord wants to sell the freehold. 

There are plans to provide leaseholders with clear support on the various routes to redress available to them (e.g. negligence claims against conveyancers) and encouraging developers to continue support schemes for homeowners effected by excessive ground rents. Also, the government is looking at closing a 'loophole' to prevent mandatory possession orders being sought when leaseholders are classed as assured tenants under Ground 8, Schedule 2, Housing Act 1988. Under the existing rules, if ground rent exceeds £250 per year or £1000 per year in London, the lease can be classified as an assured tenancy and the grounds for possession become available.

Equivalent rights for freeholders on managed estates

At present owners of freehold houses on estates with shared facilities, such as open areas and estate roads, do not have the same rights as tenants of leasehold houses to challenge the reasonableness of service charges. The government is proposing equivalent rights to challenge unfair service charges to ensure they are reasonable when paying for the use of communal areas and facilities in mixed use estates or private developments.

The government is also considering changes to rentcharges to prevent the owner of a rentcharge from being able to take possession of the property for non-payment.

Re-invigoration of commonhold and unfair terms in residential leaseholds

The Law Commission has been tasked with a project to consider how commonhold can be made to work as originally intended. The consultation highlights that a key reason for the failure of the commonhold is due to the financial incentives for developers in building leasehold.

The government also proposes to work with the Law Commission to consider whether unfair terms apply when a lease is sold on to a new leaseholder. The Law Commission proposes to look at lease terms, particularly “cases where ground rents increase exponentially, high-fixed service charges and fees on assignment.”

The timetable for these changes is unclear, leaving doubts as to whether there is enough parliamentary time to address these changes with sufficient vigour in the current political climate. There is a lot of public pressure for change so it appears inevitable now that there will be some legislation to address the issues raised in the consultation, but the Government needs to ensure that legislation is not rushed through without sufficient consideration to the impact it will have on housing development.

It is perhaps timely that the long running legal battle and pending Court of Appeal decision in Mundy v  Sloane over the calculation basis for extending a lease is due (at time of writing we had not seen a decision). This case involves a flat in Chelsea with a lease term of less than 23 years remaining. The freeholder is seeking £420,000 to agree a lease extension. If a ruling is given in favour of Mundy, the tenant, the cost of extending a lease or buying a freehold could be dramatically reduced. The form in which the valuation models for lease extensions and freehold purchases will take remains undecided. For the interim, leaseholders are left with little option than to wade through the developing case law to ascertain whether they are receiving a fair bargain.

We of course await draft legislation and it is not clear when legislation will actually be enacted and implemented. However, the consultation is likely to have an immediate impact on the market as it raises awareness and removes the element of surprise around not owning the freehold, which was a theme of the reply to the consultation. Consequently, buyers may be hesitant to accept new houses sold on leasehold basis or those subject to ground rents. However, existing leaseholders could remain the most affected as mortgage companies become more reluctant to lend against those properties, making them unsellable. The government has pointed to this in its reply to the consultation but it remains to be seen what legislation might follow that helps existing leaseholders.

Kassra Powles is an associate lawyer at Browne Jacobson

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