A review of the Government’s proposed changes to the leasehold housing market

This year the Manchester Housing Conference saw the Housing Minister appear before the delegates to explain the Government’s proposed changes to the leasehold housing market following the response to the consultation being published.  The speech largely paraphrases the consultation response with the highlights being confirmation that ground rents are dead along with leasehold houses.

Not much has changed from the last response the Government gave on the topic, albeit that they have now dropped the £10.00 a year cap on ground rents and opted for the consumer preferred choice of no ground rents.  The main points are:

Leasehold Houses

Previously the Government favoured making leases of houses unregisterable at Land Registry.  Having listened to feedback it was felt that this could leave consumers with no security for the premium paid as banning the registration would not force an errant developer to correct the problem.  Instead they have now opted for a much stronger penalty of requiring developers that sell them to pay for the enfranchisement of the leasehold house at no cost to the buyer at all (including premiums payable for the freehold and legal costs).  There will be no time limit on this either meaning that years could pass and developer will still be liable.

This change will mean that consumers will have the reassurance that they will not be left without a registerable interest and the high financial cost should mean that developers opt not to use leasehold houses.

To assist existing house lease owners, the right of first refusal will be extended to leasehold houses.  This will be a particularly useful tool for tenants because it will prevent the reversion being sold to investors who will seek to maximise the value.  Unfortunately, until enfranchisement rules are revised it could still lead to a sale price beyond the reach of most home owners, so whilst it is a welcome change it is perhaps one that will have a minor effect.

Any existing leasehold houses can still be assigned, but should the lease require a surrender and regrant then the landlord will not be able to grant a new lease and will have to sell the freehold interest.  This may have an adverse impact on certain forms of affordable housing where leases are used to control affordability but cannot be classed as shared ownership.

Ground Rents

In a departure from the Government’s previous position ground rents for all new leases will be set at zero (or a peppercorn).  The Government has rejected the idea that ground rents are used to pay for the management of a property and have opted for the consumer favoured absolute ban on ground rents for new leases.

It is not proposed that the legislation will attend to existing ground rents, but it is assumed that the market will drive change here until enfranchisement and extension rules catch up with changes.

It has been confirmed that retirement living schemes will be exempt from the ground rent cap but providers will have to offer buyers the right to pay an increased premium in exchange for no ground rent or offer a lower premium with a reasonable ground rent.  Providers that charge a ground rent not be able charge ‘event fees’ (such as assignment and notice fees but will still be able to charge for the provision of a management information pack).

If a tenant opts to extend their lease using the voluntary process then whilst the extension must be offered at nil ground the existing ground rent on the original lease may remain in place in order to reduce the premium paid for the extension.  This will mean that for the remainder of the duration of the original term the ground rent may remain, but the extension must be granted at nil ground rent.  This may be small comfort for the current tenant knowing that in 80 or so years time the ground rent is removed!

In what will potentially become a minefield for landlords and their legal advisors, lease variations which could lead to the lease being surrendered and re-granted or deemed to have been surrendered and re-granted will have the unexpected effect of setting the ground rent to zero.  If this was the intention of the variation then it can be factored into any premium charged for the variation, but if this happened by operation of law (which happens far too often) then the tenant could find themselves getting a very good deal indeed!

If a landlord seeks to charge a ground rent on a new lease the ground rent will be completely unenforceable, and they will be unable to reclaim any unpaid amounts or forfeit leases for non-payment.  In addition to this, landlords could be fined up to £5,000!

Other Changes

Freeholders will be given the power to challenge the fairness of estate costs in the same way leaseholders can now by an extension of the powers of sections 18 – 30 of Landlord and Tenant Act 1985.

Management information packs must be provided within 15 days of request and fees can be no more than £200.00 plus VAT with a £50.00 plus VAT charge for updating information.  It is important to note that the Government’s response only refers to leasehold property, but it seems fair and likely that it will equally apply to estate managers for freeholder property as well.

A new homes ombudsman is being proposed and a separate consultation has been published on this with response due by 22 August 2019.

Conclusion

Whilst greater clarity is welcome on leasehold reform this is till just statements of intent and the draft legislation would be a welcome step forward so we can all start properly planning for the future.  Even so, the clarity will allow the market some degree of certainty of the direction we are heading in and will hopefully drive conversations concerning leasehold houses and ground rents in particular.

It is worth noting that all of these changes only affect new build properties, existing leaseholders will have to wait for the changes to lease extensions and the right to enfranchise to be able to demand that landlords remove ground rents, although the right of first refusal on houses will help.

It seems likely that lenders will change their handbook positions fairly rapidly following this response and that this will drive conveyancers to seek the removal of ground rents on existing leases as well as the enfranchisement of leasehold houses potentially.  This could lead to problems in the housing market as transactions slow down waiting for deeds of variation and conveyancers meeting opposition from reluctant landlords.

Only time will tell if this is a welcome change or not.