Residential leases
in limbo –
what next?

Residential leases in limbo – what next?

Published: 15th February 2018
Area: Real Estate & Planning
Author(s): Debbie Irwin

Sajid Javid, Minister for Housing, Communities and Local Government, is seeking widespread reform to leasehold housing law in the UK. He pioneered a consultation, which received over 6,000 responses, the results of which were overwhelmingly in favour of change. Here’s a summary of the key points in Government’s responses to the consultation.

Leasehold homeowners not aware

The Government raised serious concerns that many owners of leasehold homes are not aware that they do not own the property outright, much less that they own a depreciating asset. The rising cost of purchasing the freehold of a leased house and of obtaining lease extensions is an issue that the Government aims to tackle as soon as possible.

The Government aims to do this by prohibiting new residential long leases being granted on houses, whether newly-built or existing houses. It will remain possible for existing tenants to extend their leases or purchase their freehold and the Government is looking into ways that they can support tenants to do this. The Government has not given specific guidance on what such steps might be but have commented that “new build” and “house” will need to be defined carefully to avoid any unintended consequences.

Exceptions to the rule

The Government has also made it clear that there will be certain exceptions to the ban, particularly shared ownership or where the developer does not own a freehold interest. A leasehold interest may be beneficial but not strictly necessary in other situations such as listed buildings or other areas that society wishes to protect. If the consultation response became law, such non-essential leaseholds would be banned. We need further thought about exceptions and wider policy issues.

Mitigating undue unfairness

The Government has also suggested that the legislation may also have some retrospective application. It is not suggested that they will take such drastic action such as forcing freeholders to surrender leases and sell their freeholds at a reduced rate but they will be looking to “mitigate any undue unfairness”. The problem is that fixing issues in new leases is likely to create a two-tier market for homeowners with leases. The extent of the “unfairness” they are looking to tackle is unclear but unusually high market rents will undoubtedly be top of the list. What they did make clear, however, was that in the future the Government-backed Help To Buy scheme would not support the sale of leasehold houses, although they will work together with developers on this point to facilitate a smooth transition.

Ground rent levels

It is clear from the guidance that one of the Government’s biggest concerns relates to onerous ground rent levels. It will introduce legislation that sets ground rent at a peppercorn on new- leasehold houses and flats. It is implied that this will not apply retrospectively and so existing tenants will continue to pay higher ground rent. However, more “support” will be given to those tenants with onerous ground rent provisions and for those looking to purchase their freehold or extend their leases. The form of this is unclear but initiatives such as Taylor Wimpey’s allocation of funds to address existing lease issues will almost certainly have been considered.

The Government also used the consultation to confirm that it will address the issue of ground rents causing long leases to fall into the definition of an “assured shorthold tenancy”, therefore opening tenants (& their lenders) up to the risk of mandatory possession orders for relatively small rent arrears. After they have made a large capital payment to buy a long lease, this seems disproportionate. This is welcome and should be possible within a shorter timescale than other reforms above.

Rentcharges not at risk

The Government will also be legislating to ensure that freeholders who pay additional money under rentcharges are not at risk of a rentcharge owner taking possession or granting a lease where minor rentcharge arrears arise. This is a disproportionate remedy that leaves homeowners at risk of making large payments for release.

Many leasehold house owners benefit from services for an estate and pay service charge, but leasehold house owners need similar rights to flat owners to be able to challenge unreasonable service charges. There may be a fear that unscrupulous developers would seek income from service charge once ground rents must reduce. Passing on fair charges for services should remain possible but may involve more administration.

Unsurprisingly, given the problems with leases and rentcharges, the Government is looking for an alternative. It has also confirmed that it will be looking into ways to “reinvigorate” commonhold. This was a new type of legal interest in land created in 2002. This has hardly been used due to the advantages and familiarity of the leasehold system. Commonhold also requires active tenant participation in management which tenants may find difficult either due to the pressures of current working life or as they age and have less energy and mobility. The Government will be working with mortgage lenders and the Law Commission to establish what can be done to get this off the ground.

In summary

The general message from the Government seems to be one of reform and rehabilitation for what it views as a broken system. How the changes will work in practice remains to be seen. Unfortunately, these brief indications of policy do not give enough detail for the housing market to start adapting its practices. Lenders are already putting pressure on excessive ground rents by refusing to lend in extreme cases but there is no consistency. Developers need to know where the goalposts will be so they can balance their business needs with those of consumers and lenders. Everyone agrees that the UK needs more homes, and developers must remain economically healthy so they can continue to increase our housing stock. A sensible compromise is needed.

What is clear is that the Government is not afraid to grasp the nettle. There will be significant change to an established system which is likely to have far-reaching consequences for the new build house market in England. We live in interesting times.

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