Government Proposals to Regulate the Residential Leasehold Market
In Tackling Unfair Practices in the Leasehold Market, the Ministry for Housing, Communities and Local Government has made proposals for the reform of the residential leasehold property ownership in England and Wales. These proposals include banning the sale of new build leasehold houses, other than in exceptional circumstances. The aim of this is to address the issue of such leases becoming difficult or impossible to sell by reason of them containing escalating ground rents.
It is generally only necessary to sell a house on a long lease where:
- the developer can only obtain a leasehold interest in a property because the freehold owner is prevented by law from selling a freehold interest (e.g the National Trust and owners of operational railways or waterways); or
- houses are being built with shared grounds or facilities, in order to secure future contributions from owners towards the upkeep of the same (although, in such cases, it is legally possible to secure such contributions on freehold disposals); or
- disposals are made by Community Land Trusts and retirement village operators, where age restrictions and services need to be considered.
A landlord does not need to reserve a rent in order to grant a valid lease. In so doing, however, a capital payment can be derived both from the initial receipt of the purchase price paid by the tenant to buy the lease and from the consequent creation of a long term income stream from the lease. When capitalised and disposed of by the developer, that secondary capital receipt creates a very saleable and valuable asset. Current estimates are that such ground rent sales raise £500 million a year.
There is precedent for the imposition of zero financial value ground rents in the Leasehold Reform Housing and Urban Development Act 1993. Under that Act, on the grant of a lease by way of extension of an existing lease of a flat, the extended lease replaces the lease being extended. The ground rent payable under the existing lease is then replaced in the extended lease granted with a zero ground rent.
Obviously there are huge numbers of leases reserving onerous rents already in existence. The enactment of the proposals will not remedy the issues that the existence of onerous ground rents cause to tenants of such existing long leases. Instead, tenants are promised that the Government will work with redress schemes (such as Taylor Wimpey’s Ground Rent Review Assistance Scheme), and facilitating the availability to existing redress already against solicitors having acted negligently in advising fully on the effects of onerous ground rents on purchase.
Some lenders have already introduced new lending criteria as to levels of ground rent and terms of review that will be acceptable to them. If such criteria were to be adopted across the board by lenders, then the need to ban such sales would be reduced, if not eliminated
The banning of freehold lease sales is unlikely to have an impact on supply but sale prices may be affected. In the short term developers may take the view that sale prices of houses that they would have previously sold as leaseholds should increase to reflect the inability to access the lucrative ground rent sales market once such a house has been sold.
If the Government enacts its proposals in Parliament, it can expect resistance from developers and housebuilders. One legitimate concern, already enunciated, is that the income stream from the sale of ground rents has represented access to, otherwise unavailable, development finance and the loss of that source of income may impact on the carrying out of marginal developments.
Similar legislation concerning leasehold houses has seen challenges being mounted in the courts by landlords as to what qualifies as a ‘house’. The drafting of applicable legislation will have to address the issue, as well as preventing well-prepared developers from creating schemes to avoid leasehold house sales being prevented by that legislation. In a post-Brexit Parliament, it remains to be seen whether the Government will find the time or the political will to convert what will be seen by consumers as a worthy policy into workable law.
Additionally, it will not be surprising to find that the Government, after due consultation, decides that they should not ban the sale of new Leasehold houses; and instead, simply decides to ban ground rents. This is because leases have a very useful role to play in communities that share things such as sensibly setting out mutual obligations and rights, and communal costs and services. All of the owners in such a community should benefit from a properly drawn lease that sets the tone for the estate, shares the communal costs fairly and keeps the costs lower by sharing them. Without such a Lease to refer to, future arguments are, sadly, inevitable.
Peter Robinson, Partner
This article was originally published in Mortgage Finance Gazette and can be read on page 24 here.