Residential Leasehold Reform – an end to "fleecehold".

At the end of June the Government issued a response to its December 2018 consultation on implementing reforms to the residential leasehold market in England.  This was following its pledge in December 2017 to end unfair leasehold practices, including bringing to an end what has been dubbed "fleecehold".

What reforms are the Government proposing?
The key proposals intended to be implemented are:

A ban on the unjustified use of new leases for houses.

  • This will apply to residential long leases (over 21 years) for new build homes or existing houses (unless they are already leasehold).
  • There will be exceptions, most notably shared ownership properties and retirement properties as well as financial lease products such as home reversion plans (equity release) and home purchase plans (lifetime leases and Islamic/sharia compliant finance).

Level of future ground rents to be reduced to a peppercorn.

  • This is a far more draconian measure than the cap of £10 per annum that was proposed in the consultation.
  • The Government's argument for this is that ground rent is unconnected with any maintenance obligation with the costs of management to be generally recoverable through a service charge.
  • A major exception to this is retirement properties (both new and existing), albeit subject to conditions.  The Government has bowed to pressure from the retirement property sector on this one, which warned that such a ban would have the effect of reducing the overall supply of retirement developments. Hence the Government has acknowledged that in respect of retirement developments the ground rent is used to fund building costs and to compensate for generally higher acquisition costs. This is due to land being more expensive to buy when close to existing local amenities and there being fewer saleable units on such developments.
  • Another exception is mixed-use leases (i.e. where a lease covers both commercial and residential such as a shop with a self-contained flat above).  However, this exception does not cover mixed use developments; or a separate long sub-lease of the residential flat.

Service Charge protections for freeholders

  • This will give freeholders equivalent rights to tenants to challenge the reasonableness of charges for the maintenance of communal areas and facilities. The new regime will based on the statutory rights of residential tenants pursuant to sections 18-30 of the Landlord and Tenant Act 1985 in relation to service charges.

Measures to improve how leasehold properties are sold

  • There will be a fixed time period for managing agents and freeholders to provide responses to enquires about rents and service charges.  The aim is for this to be not more than 15 working days.
  • The Government also intends to set a maximum fee of £200 plus VAT for managing agents and freeholders to provide leasehold information in the form of a LPE1 (Standard Leasehold Property Enquiry Information Form).  Updating of such information to be limited a maximum of fee £50 plus VAT.  Both of these fees will be subject to an inflation linked increase.
  • Whilst there will be maximum fees the Government expects those providing the information to charge a reasonable fee; not automatically the maximum fee. Consumers will have the power to challenge unreasonable fees.

When will these measures be brought in?

Legislation will be proposed "as soon as Parliamentary time allows".  Given that Parliament is quite busy at the moment, this probably means within the next couple of years.

What should residential developers and investors be doing now?

Given that the ban on new leases for houses and the reduction of future ground rents to zero financial value are intended to apply to any leasehold land acquired from 22 December 2017 and to any land currently held as freehold, developers and investors need be factoring in these proposals in their viability assessments and projected income forecasts as soon as possible.

The Government's view is that by the time the legislation is passed, the proposals will have been in the public domain since December 2017. In conclusion: be prepared!