2019 Government report on Leasehold Reform: the future of ground rents, service charges and selling practices
The House of Commons Housing, Communities and Local Government Committee have concluded their 2017 enquiry into unfair practices in the leasehold market.
The 108 page report addresses issues faced by leaseholders, and considers whether reforms and/or intervention should be introduced. The report makes recommendations to the Government, the Competition and Markets Authority and the Law Commission, who will have two months to respond.
The key areas of concern identified by the report were:
- Onerous ground rents
- High and unclear service charges
- Frequent 'one-off' bills
- Alleged mis-selling of leasehold properties by developers
- Unbalanced dispute resolution mechanisms
- Unreasonable costs to enfranchise or extend leases
- Future of leasehold tenure.
The concern surrounding ground rents have attracted the attention of the media, resulting in a lot of sensitivity in this area. Doubling ground rent clauses, where the ground rent doubles every 10 years, are particularly burdensome. For instance, over a 50 year period, an initial ground rent of £500 would be £16,000 by 2069. Not only are these amounts unlikely to be affordable for a leaseholder, they render the property unsellable and unmortgageable.
The report notes that it would be legally possible for the Government to introduce legislation aimed at tackling existing unfair ground rents. They recommend that existing ground rents are limited to 0.1% of the present value of a property, up to a maximum of £250 p.a.
The ground rent on any new leases will be required to be set at a peppercorn.
The committee allege that ground rent is exploitative and an exertion of developers' market dominance, as it bears no relation to the level of maintenance or quality of service provided to leaseholders. It is clear that ground rents will have no future in property transactions.
Unclear Service Charges
The report recommends that a standardised government form should be used for service charge invoicing. This will include a full breakdown of the individual parts making up the overall charge.
As an alternative to leasehold ownership, commonhold (where the homeowners in an estate or block of flats collectively own and manage the freehold), is recommended as a solution for residential buildings. This democratic method of home ownership is intended to avoid unreasonable behaviour by freeholders.
Developers have expressed concern that commonhold is not appropriate for mixed-use developments, particularly where residential owners share a block with commercial owners. Furthermore, there are no incentives for developers to build commonhold, and residents have found it difficult to obtain mortgages as it is still a relatively unusual way to hold property.
Nevertheless, the report is keen that commonhold interests should become more widely used, and that once the legislation in this area is reformed, 'leasehold as a tenure will become increasingly redundant'.
Mis-selling by Developers
The report was critical of developers, suspecting a 'serious cross-market failure of oversight' in sales practices. Purchasers stated that they were not informed about the differences between freehold and leasehold, particularly the added costs and obligations with leasehold properties.
They found 'empty promises' were made to the leaseholders about their future ability to purchase the freehold.
Developers have hit back on this, rejecting the accusation of mis-selling. David Jenkinson, representing Persimmon, is quoted in the report stating that there are many stages in the process that the buyer would be advised about the implication of a leasehold interest: 'I am not sure what more we can do…they may not fully understand the implications of it, but they must have known it was leasehold'.
The report recommends that the Government introduce a standardised key-features document for developers to use at point of purchase. It should outline the tenure of the property, length of lease, any ground rent or other additional costs. It is likely that most developers would have these details on their initial reservation form, but developers should take care to review their 'point of purchase' procedures to ensure that purchasers are given clear and full information.
Particular care should be given around assurances that leaseholders can purchase the freehold, as this was an area of concern that leaseholders had been given false promises about where, when and how they could do so.
When will legislation be passed?
The report is currently recommendation only, and the Government now have two months to consider the report. However, the report is strongly indicative of what changes are likely to be made. We are certainly expecting to see legislation passed on ground rents, due to the public interest in this area.
However, the overarching theme in the report is one of clarity. Developers and solicitors should take pains to ensure that any prospective leaseholder is given clear information as early as possible, so that they enter into any agreement fully informed about their tenure, any additional costs and the terms of the lease.
For more information, please contact Lola Skuse.