The leasehold market and the Government's promise to stop unfair practices

The Government published its formal response to its consultation on tackling unfair practices in the leasehold market on 21 December 2017 ('the Report'). The Report should be of interest to property developers, investors and occupiers and proposes a number of key reforms which stakeholders should be aware of. This article contains a brief summary of the main points.

The Report identifies that leasehold tenure has shifted from a niche market which primarily supported the ownership of flats, to a major form of tenure. In the opinion of Sajid Javid (Secretary of State for Communities and Local Government), a consequence of this shift is that leasehold is at times, no longer fulfilling its correct purpose of acting as a 'tool for making multiple ownership more straightforward'. The Secretary of State also states in his foreword to the Report that, in the hands of 'unscrupulous freeholders', leasehold has become a vehicle for extracting money from already struggling homebuyers.

According to the Report, the vast majority of responses to the consultation were in favour of reform. The Government will therefore be looking to implement legislation as soon as possible to provide enhanced protection for tenants.

The Government's Report is broken down into 6 sections. Section 1 is entitled 'Limiting the sale of new build leasehold houses'. In this section, the Government expresses a view that there is no good reason (other than in exceptional circumstances) for new build houses to be sold on a leasehold basis. The Government will therefore seek to bring in legislation to prevent the grant of new long residential leases for houses. Developers will still be permitted to sell houses on a leasehold basis if the land they are building on is subject to a lease, but this will only be permitted if the land was subject to a lease as at the date of the publication of the Government's Report i.e. 21 December 2017.

Section 2 of the Report addresses the issue of reducing the availability of Help to Buy funding for leasehold houses. The Government is of the view that Help to Buy should not support the sale of leasehold houses. Whilst the Government is not requiring developers to cease building leasehold houses under existing contracts, it does expect developers' cooperation going forward on this issue.

The Government addresses the topic of ground rents in residential leases over 21 years in Section 3 of the Report. The Government has taken issue with the fact that ground rents have increased over the years and believe a consequence of this is that some tenants will eventually find it difficult to re-sell their property. The Government's aim is therefore to introduce legislation, which caps ground rents on new leases of houses and flats to a peppercorn (i.e. zero value). The Government is of the view that costs incurred by landlords in appointing managing agents should be recovered via the service charge or a higher sale price. The Report makes it clear that this legislation will not interfere with leases granted through shared ownership schemes.

Section 4 of the Report reflects on the effects of the Housing Act 1988 on leases such as the inadvertent creation of Assured Tenancies. The Government promises to address any loopholes in the current law.

Section 5 of the Report is entitled 'Service charges for maintaining communal areas and facilities on freehold and mixed tenure estates'. This section highlights the issue that freehold property owners do not always have the same rights as leasehold owners to challenge the service charge payable within the same estate. The Government confirms that it will be making legislative provision to achieve equal rights for freeholders and leaseholders. 

Section 5 of the Report also reflects on the dangers associated with rentcharges on freehold properties. Where a rentcharge remains unpaid for a period of time, a freeholder can become at risk of having their property possessed. The Government will seek to ban this.

Section 6 concludes the Report with the Government's general commitment to improve the leasehold market for tenants.

In short, developers, investors and occupiers can expect wide scale statutory reform of the leasehold market in the near future. Those in the property industry should be mindful of the Government's views and take into account the proposed limitations on Government funding, ground rents and rent charges when planning and financing new developments.

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