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Sale of leasehold houses to be outlawed

The government has launched a consultation, aimed at tackling unfair practices in the leasehold market. Sajid Javid, the Secretary of State for Communities and Local Government has described these as "practically feudal".

The release of the consultation follows concerns that consumers are being unfairly treated by developers who are increasingly selling houses on a leasehold, rather than freehold, basis. So what does the consultation propose and what will the impact of these changes be on the housing market?

Prohibition on selling houses on a leasehold basis

It is accepted that there is a good reason for the sale of flats on a leasehold, rather than freehold, basis. This is because the freeholder retains common parts, retains responsibility for the common maintenance and insurance, and gives each flat owner a right to use these. In return, the flat owner pays a service charge.

However, the position is different where you are dealing with the sale of a house. In most circumstances, the landlord has no real need to sell a house on a long lease because the landlord is not retaining any part of its structure, and has no obligations to repair the house. There may be situations in which the landlord provides limited services and the consultation considers payments for these.  

The government is concerned that developers are profiting from retaining the freehold interest in houses, whilst consumers are disadvantaged. Homeowners who buy a leasehold, rather than a freehold, house, can find themselves paying increasing ground rents, having to pay the freeholder to obtain permission to carry out alterations to their homes, and paying additional costs to buy the freehold at a later date.

The consultation is proposing that houses should be sold as freehold, except in exceptional circumstances. Examples of special circumstances are set out. For example, houses in cathedral precincts, properties of special architectural or historic interest, or shared ownerships houses with "restricted staircasing" are cited in the consultation as special cases.

Developers argue that if restrictions on selling houses as leasehold are brought in, house prices will increase. This could lead to a slow-down in the property market.

Reducing Help To Buy Equity Loan support for leasehold houses

The consultation proposes removing Help to Buy Equity Loan support for leasehold houses unless there are specific circumstances to justify the use of leasehold. Examples of circumstances in which leasehold houses supported by Help to Buy could be justified are sought. In cases where specific circumstances justify it, support will only be available if the ground rent terms are reasonable.

Limiting the reservation and increase of ground rents on all new residential leases of over 21 years

There is currently no limit to the amount of ground rent that can be reserved under a residential lease. This can result in what have been termed "onerous" ground rents. Whilst the ground rent under the lease may not start at a high level, the lease may include provision for it to be, for example, doubled at regular intervals. This does not just lead to the homeowner paying what can be quite large sums, for no obvious benefit, it can also restrict the availability of mortgages.

The consultation proposes limiting the ground rent in new leases to a "peppercorn" for houses, and seeks views on steps that could be taken to improve the situation of leaseholders with existing onerous ground rents.

Onerous ground rents are not restricted to leasehold houses; they are also a huge issue on flat schemes. Developers who wish to include such provisions in their leases are going to face difficulties in securing purchasers, particularly where those buyers need to secure a mortgage.  This problem is especially prevalent for "off plan" sales where purchasers are expected to commit many months in advance of the Unit being ready. Buyers' solicitors are going to have to advise clients of the risk that lenders will not provide future mortgage offers for any leasehold interest (house or flat) which provides for potentially onerous ground rents.

Possession under Ground 8 of the  Housing Act 1988

The way in which the Housing Act 1988 is currently drafted means that a long lease which is subject to a ground rent of more than £1000 per year in Greater London, and more than £250 per year elsewhere, is classed as an assured tenancy. The effect of this is that, if the ground rent remains unpaid, the landlord can bring proceedings to terminate the tenancy. This could lead to a homeowner, who has paid a substantial sum for their house, having their lease terminated. If this happens, the lender is left without any security.

This issue is currently tackled by the inclusion of a mortgagee protection clause in the lease. Whilst this satisfies most developers, and provides protection to lenders, the amendment of the legislation to make it more fit for purpose would be welcomed.

The future

In addition to the proposals for reform set out in the consultation, the following are identified as areas for review:

  • Improving commonhold;
  • How managing agents operate; and
  • Leasehold terms and enfranchisement.

Views are also sought on any other issues for reform.

It is clear that the government is committed to ensuring that the rights of consumers are protected. Whilst the proposals in the consultation will be welcomed by purchasers and their lenders, developers may be forced to look for other ways to ensure that the delivery of new homes remains financially viable. This could mean an increase in house prices. It should not be forgotten that the primary  aim of developers is to secure sales of their residential units and looking for marginal gains on ground rent sales may distract them from this path. The current climate and the impending review mean it is likely that confusion and delay will increase for plot sales, with buyers' solicitors being reluctant to sign off leases as being CML compliant and mortgage offers not being readily available where any scheme something deemed to be an "unfair" ground rent position.

Contributor: Alexandra Holsgrove Jones

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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