Tackling unfair practices in the leasehold market
The Government published its consultation paper on leasehold practices in July 2017
This stems from the Government's concern at the leasehold sale of new homes and a lack of fairness and transparency to buyers.
We submitted a consultation response, following discussions with private developers, registered providers and other sector bodies. This article will examine the main proposals and share some insights from our research.
Grant of leases for new houses
The consultation sought views on limiting the leasehold sale of new houses (as distinct from flats, where leases are required to impose the key obligations relating to occupation), with exceptions, including shared ownership and retirement villages. It identified the likely lower capital value attached to a leasehold, rather than a freehold interest and the income stream created from the creation of the ground rent interest. It raised concerns that the implications of a leasehold, rather than a freehold ownership, are not fully understood by buyers.
Leases are not in themselves, intrinsically problematic. They are, on the contrary, an effective means of creating enforceable obligations for the management of estates. Our research indicated that a ground rent can help compensate a landlord for the acceptance of these obligations, encouraging the proper management of the estate.
Instead, developers have called for better and more detailed information to be provided to buyers, in the sales pack and in marketing material, to ensure that buyers are clear on the obligations they sign up to.
The consultation proposed that ground rents in respect of all new homes should be reasonable. There is evidence of excess (e.g. initial rents set at several £1000s), but care should be taken in determining what is reasonable. Responses on the level of rent varied, with initial levels set at 0.1% of the value of the property or fixed maximum figures. Rent reviews in turn could be limited to 0.1% of the value, or possibly to RPI.
Our research showed that the value of the ground rent will generally form part of the viability assessment of a development. Restricting the capital receipt from the ground rent could restrict the level of supply, especially of social housing.
Views were sought on whether long leases should be removed from the Ground 8 grounds for possession under the Housing Act 1988. Where ground rents exceed set limits, leases are assured tenancies, meaning landlords can seek possession where the rent is more than three months in arrears. If the landlord makes out the Ground 8, the court must order possession.
We found a generally positive response. If shared ownership leases are no longer assured tenancies, however, that will have the unintended consequence of making arrears of specific rent more difficult to recover.
Finally the consultation sought views on whether to extend protection from unreasonable service charges to freeholders, who at present have no statutory protection from unfair charges. Responses to this were generally positive.