Consultation on banning leasehold houses and high ground rents for new builds in England

Building on a manifesto pledge the Government has issued a consultation aimed at "tackling unfair practices in the leasehold market" in England. Key proposals include:

Prohibiting the sale of new leasehold houses

The consultation highlights Government concerns that new build houses are being sold on a leasehold basis purely to generate additional revenues from the ground rent income stream, management fees and the sale of the freehold interest. The Government is concerned that this approach represents poor value for consumers and that there are many hidden costs for home owners. The consultation notes that the Government is not convinced by arguments from developers and landowners that preventing them from dealing with the freehold interest freely would see an increase in the upfront cost of the property and notes that it is not clear the "leasehold discount" is always passed on to the consumer.

The consultation identifies that there are certain unusual circumstances (for example where property is on National Trust or Crown land or land within a cathedral precinct) where houses will be sold on a leasehold basis and that new garden villages or retirement homes may also create situations where leasehold houses are preferable. However, the approach of the consultation is that leasehold houses should not be commonplace, despite it currently being prevalent in certain parts of the country (the North of England being given as an example with Cheshire, Greater Manchester, Lancashire and Merseyside being identified specifically).

Among the questions raised in the consultation are what steps the Government should take to limit the sale of new build leasehold houses and whether limiting the sale of leasehold houses would affect the supply of new build homes.

Note that this refers to leasehold houses, not leasehold flats.

Possible changes to the Help to Buy scheme in relation to leasehold houses

The Government notes that they "propose to remove as far as possible Help to Buy Equity Loan support on new build houses where these are sold as leasehold. Only where there are specific circumstances to justify the use of leasehold will Help to Buy Equity Loan support the sale." If there is such justification for the tenure of the house to be leasehold then the ground rent must be reasonable for the scheme to be available.

Limiting the starting value and increase of ground rents on all new residential leases over 21 years.

In a move that could see the ground rents market closed to new supply, the consultation notes that the Government is "minded" to introduce measures which would limit ground rents in new long leases to a peppercorn rent (with possible minimal exceptions (£10 per year) for those exercising the Right to Buy. The justification put forward in the consultation for adopting this approach is that, unlike service charge or managing agent fees, leaseholders receive no return or value for the ground rent. The consultation also invites views on what a "more "reasonable" ground rent regime would look like if a case was made for this."

The consultation notes the "challenges faced by existing leaseholders with "onerous" ground rents" and invites views on ways in which these leaseholders could be supported. (The consultation references steps to tackle unreasonable and onerous rises in the future and increased consumer rights.) The consultation highlights and welcomes the fact Taylor Wimpey has voluntarily set up a £130m scheme to assist its customers affected by ground rent increases.

The consultation also touches on other ways in which changes in practice relating to ground rents may be brought about. In May 2017 Nationwide changed its lending criteria, noting that they no longer lend on properties with ground rents that double every 15 years or less and instead require that ground rent increases should be linked to a verified index, such as RPI. In addition, for new build properties purchased from developers, the maximum starting ground rent for Nationwide would be 0.1% of the property value, with lending only available for leases of 125 years or more for flats, and 250 years or more for houses (although the changes would not apply to shared ownership properties). If other lenders adopt a similar approach then it is likely the market will react quickly to this to ensure that new build properties remain acceptable mortgage security for mainstream lenders.

Updating Ground 8 of the Housing Act 1988 so long leases over 21 years with an annual ground rent over £1,000 in London and £250 outside of London cannot be an Assured Tenancy

Additionally, in a step likely to be welcomed by lenders and long leaseholders alike, the consultation acknowledges the "unintended and unfair consequence" relation to those long leases granted after January 1989 where the ground rent is high enough to bring the lease under the assured tenancy regime. The difficulty for those with ground rents high enough to be caught by the Housing Act 1988 is that failure to pay the ground rent gives the landlord the option of seeking a mandatory possession order under Ground 8 of that Act. This leaves the court no choice but to order possession for failure to pay a ground rent under legislation which was intended to ensure assured tenants in the private rented sector do not build up rent arrears. The proposal is to exempt long leasehold interests from "Ground 8" possession orders.

Providing freeholders on private estates with equivalent rights to leaseholders to challenge the reasonableness of service charges via the First-tier Tribunal (Property Chamber)

The consultation notes that freeholders on private estates do not have the same rights as leaseholders to challenge the reasonableness of service charges. The consultation notes that the Government wants to promote appropriate rights for all freeholders living on private estates to challenge the reasonableness of service charges.

Future reform

The consultation also looks at areas for future leasehold reform; the suggestions include improving commonhold (which has had minimal take-up), how managing agents operate, and leasehold terms and enfranchisement. The consultation asks what further areas of leasehold reform should be prioritised and why.

Comment

Ground rent investments are regarded by some investors as an attractive opportunity because of the long-term, secure income they provide. There is also the potential benefit to the investor of being able to collect a further, and potentially substantial, premium if a lease needs to be extended or the tenant wishes to purchase the freehold, and if the ground rent is on the high side and subject to steep increases then the relevant marriage value will push up the premium. The sale of the ground rent interest also represents an additional return for the developer over and above the proceeds from the sale of the individual units, assuming that retaining the freehold for separate sale and reserving a substantial ground rent does not affect too much the sale prices achievable on the sale of the individual units.

The consultation’s general stance is that that the balance is currently too much in favour of developers and ground rent investors, and indicates concern by the Government that consumers may not be fully aware of all future costs at the time of purchasing a leasehold property.

As noted above, a change in mortgage lending criteria may bring about a new approach. Lenders lay down their criteria and standing instructions to solicitors in the Council of Mortgage Lenders Handbook and, whilst there are many requirements in relation to other title matters, few lenders have so far specified any particular requirements as to acceptable levels of ground rent. It will be interesting to see whether the consultation spurs other lenders to adopt a similar approach to Nationwide and whether the Government will set new best practice by updating its Help to Buy criteria, which would be a non-legislative policy change.

For those leaseholders already affected by high levels of ground rent, the recent decision in Arnold v Britten suggests the Courts will be unable to assist without some form of Government intervention.

It may be the case that we see a more cautious approach from those investing in ground rents and push back from consumers and their solicitors on leasehold houses and leases containing high ground rents pending the outcome of the consultation and next steps.

The consultation runs for eight weeks from 25 July 2017 until 19 September 2017.