Emma Wells discusses how proposed reforms to the property market will place landlords and developers under greater restrictions.
The number of responses the Government consultation received highlights the strength of feeling about perceived unfair practices in the property market. Leaseholders, and those that represent them, feel that developers and investors have been taking advantage of buyers’ unfamiliarity with the concept of leasehold and their relatively weak bargaining positions. The importance of the issue to the man on the street will mean that the Government will want to be seen to be taking steps to deal with the concerns raised as soon as possible. As well as the proposals discussed here, the Government is currently considering reforms to other areas of the property market, including placing managing agents on a professional footing, tackling unfair service charges, providing leaseholders with greater choice over their agent and introducing landlord redress schemes. What is certain that there will be more changes to come, with developers and landlords subject to even greater restrictions.
In February 2017 the government published a White Paper entitled “Fixing our broken housing market”, which resolved to tackle “unfair and unreasonable” practices in the property market. Of particular concern to the Government was the growing practice of developers selling new build houses on a leasehold basis, with onerous terms in favour of the landlord, land particularly the right to charge leaseholders an increasing ground rent.
In some parts of the country (particularly in the north of England), leasehold is now the default tenure for those buying new-build houses. The Department for Communities and Local Government described such practices as “feudal” and “entirely unjustifiable” and launched a consultation entitled “Tackling unfair practices in the leasehold market” seeking views on the most pressing areas for reform.
In December 2017 the Government published a summary of the responses it had received to the consultation and its consequential proposals for reform. These include confirmation that there will, in future, be a ban on the sale of new build houses on a leasehold basis.
The consultation received over six thousand responses from a wide range of interested parties including leaseholders, developers, investors, lenders, solicitors, management companies and organisations representing these different groups. The following is an overview of the responses:
- 80% of all respondents considered that the sale of new build houses on a leasehold basis should be banned in all
- The majority of developers accepted that in most cases it was not necessary to sell new build houses on a leasehold basis.
- Buyers were often not aware that they were purchasing a leasehold rather than a freehold (or at least didn’t properly understand the difference between the two).
- Buyers lacked understanding about the concept of ground rent and its potential to increase over time.
- Buyers also did not realise that the cost of buying the freehold could increase significantly or that the developer might sell on the freehold to an investor.
- There were differences in opinion as to whether leasehold was necessary where houses were built with shared facilities and services. Developers and respondents with a legal background argued that leasehold was necessary to ensure contributions were made to the upkeep of such facilities. Others argued that this could be achieved though alternative mechanisms e.g. estate rent charges.
- Very few respondents believed that banning leasehold would increase house prices; many respondents felt there was no evidence of leasehold properties being sold at a significant discount to the freehold.
- Investment companies argued that limiting new leasehold houses would have a negative impact on the marketability of existing leaseholds and limit leaseholders’ access to mortgages.
- Suggestions of how leaseholders could be better protected included capping ground rent at a peppercorn, linking increases in ground rent to the Retail Price Index a minimum of every 10 years and setting a minimum term for leases of between 250 to 999 years.
- Residential leaseholders felt that developers were using the leasehold system to maximise their returns and generate further income streams above the initial profit from building out the properties.
- There were mixed responses to the question of whether banning new build leasehold houses would affect the supply of new homes. Lenders and housing practitioners did not think supply would be affected but considered that prices may go up. Some developers thought that a blanket ban on new build leasehold houses would have a negative impact on supply.
- One suggestion was the introduction of a voluntary cross-industry code of practice for developers, freeholders, lenders and investors rather than a complete ban on leasehold.
The Government’s response
- Legislation will be brought forward to prohibit houses being sold on a leasehold basis, whether new build or on existing freehold houses.
- The Government will be introducing mechanisms that make it easier to create long-term, legally binding arrangements to cover the cost of shared services and communal areas and facilities and maintenance of these, in place of existing leasehold structures. We await sight of these
- Legislation will be introduced to ensure that freeholders who pay charges for shared services and communal areas and facilities have rights to challenge the reasonableness of those charges equivalent to the rights leaseholders have in respect of service charge.
- The Government is of the view that there is no good reason for new build houses to be sold on a leasehold basis, except in exceptional circumstances.
- The government’s rationale behind this change:
- Many buyers do not make an active or informed choice to buy a new-build leasehold house.
- Buyers often do not appreciate that they are purchasing a depreciating asset or that the freehold can be sold to a third party investor.
- A discount to buy leasehold (rather than freehold) was not applied across the board.
- Any such discount would generally, in any event, be outweighed by the long term costs of owning a lease.
- The Government is very concerned about existing leaseholders becoming subject to very high ‘modern’ ground rents when exercising their right to extend their lease and, whilst existing leaseholders will still be able to extend their lease or purchase their freehold, the Government will consult on proposals to them doing so on more favourable terms.
- The Government will consider exemptions from the ban on leasehold houses for special circumstances, such as shared ownership or some Community Land Trusts. (CLTs are a form of community-led housing under which land is owned by a trust, usually comprised of members of the local community, and is set up and run by the members who develop and manage homes and shared facilities on the land. CLTs are often used to ensure homes on the land remain affordable for the local community).
- Where developers themselves only own a lease in the land they will continue to be able to build and sell leasehold houses on that land, provided the lease was in place at the time of the consultation response. Any future legislation on this will presumably allow for the developer to be able to recover any rent it has to pay under its lease from its own leaseholders.
Other key points
- The Government has stated that is not appropriate for the ‘Help to Buy’ scheme to be used in such a way that supports the sale of houses on a leasehold basis. The Secretary of State has written to developers strongly discouraging the use of ‘Help to Buy’ equity loans for this purpose.
- The Government is concerned that ground rents have risen from historically small sums to become very onerous. They propose to introduce legislation so that ground rents on newly established leases of houses and flats are set at a peppercorn. Landlords will have to recover their costs through the service charge (which is subject to separate and extensive regulation).
- The Government wants to see developers assist leaseholders (including second-hand buyers) to mitigate the effect of onerous ground rents and for customers to be proactively contacted by developers.
- If developers do not act voluntarily then legislation may have to be introduced. The Government’s report cited with approval Taylor Wimpey’s ‘Ground Rent Review Assistance Scheme’. This scheme was set up to assist buyers who had purchased homes from Taylor Wimpey with ground rents that doubled every ten years. Through this scheme Taylor Wimpey assist homeowners to renegotiate the terms of their leases with their freeholders to incorporate materially less expensive ground rent review terms – with reviews usually linked to RPI).
- The Government will consult on making it easier and less expensive for leaseholders to buy their freehold or extend their lease, whilst ensuring fair compensation to the landlord.
- Steps will be taken to address the loophole that means those paying a ground rent of over £1000 in London are classed as assured tenants and can therefore be evicted under the Housing Act 1998 for fairly small amounts of rent arrears.