The death bell tolls for leasehold

Posted by Chris Carr on
Today, Thursday 21 December 2017 is an important date to be noted – marking the beginning of the end for leasehold.

The Communities Secretary, Sajid Javid, announced that leasehold has effectively had its day and the Government would be bringing forth legislation in 2018 (target of before the summer recess) which will substantially reform the leasehold market.

If you have not already read the formal response it is worth doing so.  It is notable how very clear the responses to the questions are and particular the high level of leaseholder engagement (78.8% of respondents identify themselves as being a leaseholder), which perhaps explains the Government's response.

The headlines are:

  • An end to leasehold houses.
    • Shared ownership gets an exemption as well as, possibly Community Land Trusts.
    • All other sectors (including housing for the elderly) will have to make their case for an exemption.
  • Ground Rents to be reduced to a peppercorn (zero financial value) on all newly established leases for houses and flats.
  • Leaseholders which have onerous ground rents (including second hand buyers) will get help in a variety of ways:
    • The Government require developers to compensate and deal with onerous ground rents in a far more proactive way.  The Government will not rule out further action if developers do not do so.
    • Information to consumers on how to pursue negligent conveyancers (potential changes to unfair terms that will deal with selling on leases)
    • Increasing the use of the Right to Enfranchise and Lease Extensions, making it easier, cheaper and quicker for leaseholders to 'buy out' their landlord's and ground rents.  A simple formula similar in nature to the Rent Charge formula used previously is sought.
  • There will some non-descript solution to fix the loophole in the Housing Act 1988 (that declares some long leases with higher ground rents automatically as assured tenancies) so that leaseholders are not subject to unfair possession orders.
  • Estate charges for freeholders (whether rentcharges or estate service charges) will be brought into line with leasehold service charges and leaseholders will have the same rights to challenge unfair service charges and costs.
  • Rentcharge rules will be amended to remove the right for the Rentcharge owner to repossess someone's property for non-payment.
  • Other changes being considered for the future include, minimum lease terms and the reinvigoration of Commonhold.

The ban on leasehold houses, whilst not a shock, goes further than was expected with the only real effective exemptions being Shared Ownership and those estates where the land is owned leasehold to begin with. 

Community Land Trusts may get a consideration, but the ban will have an effect on many sectors that rely on leasehold housing, chief amongst them elderly living schemes.  Providers of such schemes will now have to make their case to the Communities Secretary for an exemption.

Whilst it was expected that a curtailment of ground rents was highly probably, few expected the it to go so far.  House builders and lenders alike seemed to have settled on peppercorn ground rents for houses no more than 0.1% of the market value with reviews no more often than every 21 years for flats.

Maybe it is because of the demographic of the majority of responders but, at least for new builds, ground rents are a thing of the past.  This will almost certain create an immediate demand for all ground rents to be terminated for soon to complete new build sales from today onwards.  Buyers will not wait for legislation

The Government has considered leaseholders who directly purchased leases from a developer in recent years. Developers will be required to compensate and deal with onerous ground rents and the Government with give buyers more information on how to take action against negligent legal advisors.

Existing leaseholders, who have not purchased from a developer, may have to wait for legislation though.  When legislation does arrive, it does create the disparity between existing leaseholders and those who recently purchased/are purchasing.  The former will have to expend their own money to 'buy out' the ground rent, whilst the latter will enjoy developer funds to pay for such costs.

Unless the legislation makes the extension or enfranchisement something that the landlord has to pay for, then existing leaseholders will likely suffer from devalued leases or having to expend (what will still be large for many) sums of money to make their leases viable.

Assuming that lenders move quickly requiring ground rents to be removed for a property to be considered for mortgage we could see a brake put on the leasehold housing market for existing leaseholds.

Pension trusts are another loser in this, having purchased a substantial number of ground rents from developers with a view to holding then as long-term stable investments for the pension portfolios, they will now have to deal with depleting returns as people 'buy out' their ground rents which may be quite costly.

Finally, and mainly for the lawyers, the threat of the resurrection of Commonhold has become a reality.  Commonhold sounded like a great idea, but without substantial reform, it is unduly complicated and quite expensive.  An answer to leasehold it is not.

About the Author

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As the Head of our New Homes sales team, Chris oversees the firm's sales offerings to our Developer clients.

Chris Carr
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