The place of the lease in the UK property market looks set to change as the government issues its response to the recent consultation on tackling unfair practices in the leasehold market, and proposes significant legislative amendment including a ban on both the use of leases of houses and the inclusion of ground rents in all leases.
The context of these proposals is the recent press coverage on the practice of including onerous ground rents in residential leases, and providing for significant annual ground rent increases (such as the 'doubling rent' provisions which see ground rents double at set time periods).
There is no question that protection for leaseholders against draconian provisions which see leaseholders faced with large, and sometimes unexpected, increased financial obligations should be welcomed. However, there are a number of potential consequences of the government's proposals which are worth further consideration, as they do not solely affect unscrupulous landlords.
Of particular note is the following:
Leases of houses are to be banned
Save in specific circumstances laid down by legislation. The extent of these specific exemptions is will need to be carefully considered to ensure the ban does not, for example, adversely affect the success of shared ownership schemes, retirement living schemes and other products which benefit communities. The main concern for mainstream house sales will be how to protect estate amenity provisions.
The government suggest they will be reviewing the place of Commonhold in the UK market as a potential solution, but in the absence of an alternative tenure if the proposals become law existing methods, such as transfer covenants and rent charges, would need to be used to protect amenity arrangements.
Linked to this proposal is the suggestion that freehold owners will be given the same rights as leaseholders currently have to challenge maintenance charges which they consider unfair, which would remove the current discrepancy between leaseholder rights and freeholder rights in the context of service charges. This is to be welcomed although the way the ultimate remedy would operate needs to be considered.
Ground rents in all leases is to be zero or a peppercorn.
This will have a significant impact on housebuilder's financial appraisals and long term ownership of freeholds will no longer be an attractive proposition. Service charge provisions will need to be reviewed to ensure the costs of managing leasehold properties can be fully recovered.
The government have stated an intention to review the enfranchisement legislation
This is to make it easier for leaseholders to extend their leasehold interest or buy their landlord's interest, and to ensure the compensation received by the landlord is fair. It remains to be seen exactly what reform the government intends.
Closing a loophole
There is a legal loophole which currently enables landlords of long leaseholders to terminate a long lease on the mandatory ground of rent arrears. The government proposes to close this loophole which is a welcome proposal as it prevents long leaseholders from unfairly losing their proprietary interest.
Exemption will only apply to land which was subject to a lease as at December 2017
There is a suggestion in the consultation response that some of the legislation may have retrospective effect. For example, one of the proposed exemptions to the ban on leasehold houses is where the housebuilder itself only has a lease, and the response suggests that this exemption will only apply to land which was subject to a lease as at December 2017 which is the date of the consultation response. Presumably this is to prevent housebuilders granting intragroup leases now in a bid to circumnavigate the proposed legislation.
The views of lenders to these proposals is not yet known, and may well mould the government's current thinking as there will be no appetite to implement anything which will prevent a healthy property market.
Whilst the detail of the legislation is still to be published, and may well be influenced by government discussions with lenders, the fundamental intention of the government is unequivocal – there will be changes to leasehold legislation. It is difficult for housebuilders to anticipate exactly how any legislation will be enacted but consideration should now be given as to how financial appraisals can be modelled so that developments remain financially viable without long term ground rents on either flats or houses. Housebuilders should also be operating on the basis that leases of houses should be avoided when structuring a transaction. Trowers & Hamlins will monitor the progression of these proposals and respond to any consultation the government issues on the legislative data.
