Ground rents will be restricted to £0 in future leases and new long leases of houses will be banned, subject to limited exemptions.
Those are the two headline measures set out in the government's eagerly-awaited response to last autumn's consultation on leasehold reform in England. We previously wrote about the consultation here.
The government has also confirmed its intention to make communal area maintenance charges for freehold home owners fairer; and to improve the selling process for leasehold properties.
The consultation proposed a cap on ground rents in residential leases of £10 per annum, but the proposal is now to limit them to £0, effectively banning new residential ground rents.
Developers had argued that a nominal cap would result in less qualified landlords taking over the running of leasehold blocks, resulting in lower standards of maintenance. The government disagrees with this. It considers the correct mechanism to support maintenance is through a service charge arrangement and not ground rent.
Ground rents will be permitted in leases of retirement properties and community led developments. In both cases the government believes ground rents are important methods of funding the development. Mixed use leases where a single lease covers both commercial and residential will also be exempt.
There will be no exemption for shared ownership properties, but the ban will not affect payment of the rental element for the landlord's retained equity.
Neither will there be any exemption for replacement leases following a surrender and re-grant. However, to avoid tenants having to pay higher costs on lease extension, the ground rent will be allowed to continue under the replacement lease, but only for a duration equivalent to the unexpired period of the previous lease.
The ban on new ground rents will come into force on the date the legislation is brought into effect. There will be no transition period.
Any ground rent above £0 will not be legally enforceable. Leaseholders will have the right to apply to the First-tier Tribunal to seek a refund for any incorrectly paid ground rent and any associated costs, with no time limitations.
Freeholders who charge prohibited ground rent will be liable to fines of up to £5,000 per property. The Secretary of State will have the power to increase this for repeat offenders in future.
The ban will apply to leases of more than 21 years of both newly built and existing freehold houses. It will apply both to:
The definition of "house" will be finalised during the drafting of the legislation. However, by requiring vertical division of any houses forming part of the same building, the government has made it clear that flats will not be caught by the prohibition on leasehold sales.
The ban will be subject to limited exemptions, where the sale of leasehold houses will continue to be permitted. These include shared ownership properties, community led developments, certain National Trust land and excepted sites on Crown land, all of which were proposed in the initial consultation. In addition, retirement properties and financial lease products (such as equity release and Sharia-compliant finance) will be exempt; nor will the ban will apply to agricultural tenancies.
Tenants of exempted leasehold houses (whether new or existing) will be granted a statutory right of first refusal. This will give them the chance to buy their freehold before a landlord sells it to a third party.
There will be no transition period. The ban will apply as soon as the legislation comes into force and it will have retrospective effect in relation to any leasehold land acquired after 21 December 2017.
The government wants to prevent developers purchasing and stockpiling leasehold land in order to circumvent the ban after it comes into effect.
The key question in relation to leasehold land will be whether the developer owned it as of 21 December 2017. If it did, then it will be permitted to sell off the developed houses on a leasehold basis. If not, then the development will be frustrated unless the developer can negotiate also to acquire the freehold. No doubt that would incur significant further costs. Developers are therefore under pressure to complete the development and sale of existing leasehold sites before the legislation comes into force (expected in 2020).
Importantly, a developer with the benefit (as at 21 December 2017) of an option agreement to purchase a leasehold site will not be treated as owning it at that date.
The consultation does not directly address the position of a developer who was bound to purchase leasehold property prior to 21 December 2017, but did not complete their purchase until after that date. Such a developer could find that, unless they have completed any sales of leasehold houses before the legislation comes into force, they could be prevented from doing so.
The government says that purchasers of leasehold houses will be entitled to have the freehold title to their house transferred to them at no cost. The onus is on developers to market properties correctly and they will have to bear the costs (both the premium and legal costs) of rectifying the position. More detail is needed as to how this will work in practice, and is expected to follow in the legislation.
To avoid purchasers being left with invalid leases, the government has dropped the consultation proposal that defaulting leases should be incapable of registration at the Land Registry. However, an applicant for registration of a new lease will have to declare that it is compliant with the legislation. Invariably it will be purchasers' solicitors making such a declaration and the onus will fall on them to ensure new leases comply.
There will be no time limit for purchasers to bring claims against developers for the transfer of the freehold, as the government believes purchasers may not necessarily become aware of the issue for years following their purchase.
Although the government considers that this will be a sufficient deterrent for developers, the legislation will also allow the Secretary of State to introduce additional fines if needed in future.
The government will give equivalent rights to freeholders as leaseholders currently enjoy, to challenge the reasonableness of estate rent charges. Freeholders will have the right to apply to the First-tier Tribunal to appoint a new manager to manage the provision of services covered by estate rent charges. The government will also consider introducing a "right to manage" for freeholders.
To speed up the process of selling a leasehold home, the government will introduce a time limit of 15 working days and a maximum fee of £200 plus VAT for freeholders to provide leaseholders with the information they need to sell their home.
The government says that it will bring forward draft legislation as soon as Parliamentary time allows. In the current political climate it remains to seen how soon this will be. It is hard to see how any legislation could be in force before 2020 at the earliest.
Concerns have been expressed that the changes could lead to further increases in house prices. Developers may need to charge more for properties to offset lost ground rent income streams. This would work against the government's stated aim of encouraging more people onto the housing ladder.
Clearly, businesses investing in ground rent portfolios will be significantly affected.
The changes do little (the right of first refusal aside) to help existing leasehold house owners or those subject to high ground rents. Existing leaseholders subject to ground rents will rightly fear that their interests may become less marketable and valuable. It cannot be the intention of the government to reduce the value of existing homes subject to ground rents. It will be interesting to see what, if any, changes might be in store here. For example, in relation to potential reforms of enfranchisement law.
It remains to be seen whether lenders might change their lending policies in the light of this response, or once the legislation comes in. If they will no longer lend on existing properties subject to ground rents, this may force sellers, buyers and freeholders to vary leases at the time of a sale to remove any ground rent.
Others have concerns about the management and stewardship of apartment blocks, citing that professional landlords are attracted by the possibility of recouping ground rents. The alternative is a tenants' management company, but in our experience these can cause complications for tenants if not managed appropriately.
Contributor: Matt Battensby
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