Government Plans To Target Unfair Practices In The Leasehold Market

The Government has released a consultation paper entitled, Tackling Unfair Practices in the Leasehold Market[1], aimed at drastically reducing ground-rents and banning leaseholds on new-build houses.

There has been a trend over the past few years for new-builds to be sold as leaseholds and this is causing serious problems for home-owners, especially in the north-west of the country.

Earlier this year, Taylor Wimpey, one of the UK’s biggest housebuilders, apologised to homebuyers for the “unexpected financial consequences” of what have been considered “onerous” leasehold deals.

Under the terms of the leasehold, the ground rents of homeowners doubled every year, making the properties difficult to sell in some cases.

The developer has set aside £130 million towards making ground rents for those customers “materially less expensive”.

Taylor Wimpey said it was in negotiations with most freehold owners to change the contracts, and would “pursue other avenues” to help other customers.

What is the difference between a freehold and a leasehold

If you own your property (the building and land) outright, you have a freehold.  A leasehold is where a person owns their home only for the length of their lease agreement with the freeholder.

The distinction between a freeholder and leaseholder dates back to feudal times: from the 11th century, freemen owned land on which tenant farmers toiled. In the 18th century, aristocratic families such as the Cadogans and Grosvenors (the Dukes of Westminster) sold long leases on their land to developers, allowing the development of London’s “Great Estates” such as Mayfair and Belgravia.

This style of land ownership continues to this day.  Many Russian oligarchs who have invested in beautiful London property may be, in reality, tenants of a British aristocratic family who have owned the land their home sits on for generations.

Leaseholders must pay ground rent to the freeholder and may have to pay fees to make changes to their property.  If the lease is allowed to expire, the property returns to the freeholder.

If a leaseholder owns a flat in a building, they have a right under the Leasehold Reform, Housing and Urban Development Act 1993 to act with other tenants to buy the freehold of their building if they meet certain qualifying criteria. This is known as collective enfranchisement.

The proposals under the consultation paper

According to figures from the Department for Communities and Local Government, around 21% of private housing in England is owned by leaseholders, with 30% of those properties being houses rather than flats.

Restricting the sale of new-builds as leaseholds

The paper states that the government is “concerned that new build houses are being sold on a leasehold basis to create an income stream from the ground rent, or to generate additional income from the sale of the freehold interest after contracts have been exchanged”. The Government thinks that this represents poor value for consumers.

Developers argue that “restricting their ability to sell on freehold interests to third party investors will result in increased house prices, in order to compensate developers for selling the freehold interest to the purchaser, and will reduce choice”.

The proposal heavily supports the idea of restrictions being placed on new-builds being sold under leasehold, pointing out that any initial savings on the cost of purchasing the property may be swallowed up quickly with the additional expenses owning a leasehold incurs (such as ground rent and paying to increase the term of the lease when it approaches less than 80 years to run).

The government also proposes to remove, as far as possible, Help to Buy Equity Loan support on new build houses where these are sold as leasehold.

Limiting the reservation and increase on ground rent

The government points out in its paper that leaseholders receive no return on investment in exchange for paying ground rent, in contrast to paying a service or maintenance charge for the upkeep of a building.  It also highlights that developers are increasingly selling leasehold properties with shorter ground rent review periods, often as little as every ten years.

The paper has asked for interested parties’ views on limiting ground rents on new leases to ‘peppercorn’ rate.

Exempting leaseholders potentially subject to ‘Ground 8’ possession orders

An unintended consequence of increasing the levels of ground rent is that, where ground rents exceed £1,000 per year in Greater London and £250 per year elsewhere in England, leases are classed as an assured tenancy under the Housing Act 1988. This means that the landlord can seek possession of the property by an order of the court, and attempt to evict the tenant.

This was originally intended to prevent assured tenants in the private rental sector from building up rent arrears.

Ground 8 covers mandatory grounds of possession for an assured tenancy as amended by the Housing Act 1996 and concerns arrears of rent. Where a leasehold is treated as an assured tenancy and ground rent is payable yearly, if at least three months’ rent is more than three months in arrears a landlord can automatically seek a possession order and the court has no choice but to grant it.

The paper proposes amending the Housing Act 1988 to remove the right of a landlord to seek a Ground 8 possession order against a leaseholder with an annual ground rent of over £1,000 in Greater London, or over £250 elsewhere in England, that has more than three months’ arrears of ground rent.

Giving freeholders on estates the right to challenge unreasonable service charges for the upkeep of communal areas

In some estates, there is a mix of freeholders and leaseholders.  Both types of owners may have to contribute to the upkeep of certain facilities, such as the maintenance of private roads, playparks and electric gates.

Qualifying leaseholders have the right to challenge the reasonableness of any service changes through the First-tier Tribunal (Property Chamber).  Freeholders do not enjoy this right.

The government wants to provide equivalent rights to freeholders to challenge the reasonableness of service charges in mixed-estates.

In summary

The consultation is to last for eight weeks and applies only to England.  If the proposals are supported in submissions, it will bring the law of leasehold in line with the expectations of property owners in 2017.

Bennett Griffin are award winning solicitors based in West Sussex with offices in central Worthing and Ferring.  Our experienced and specialist solicitors offer a comprehensive service and will work with you in an honest, considered and practical manner.  Our property department advise developers and purchasers in relation to new-build housing matters.  Please contact us on 01903 229 999 or by email at info@bennett-griffin.co.uk for more information.

The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/632108/Tackling_unfair_practices_in_the_leasehold_market.pdf