Paul Beanlands
Posted on 16 Jan 2018

Tackling unfair practices in the leasehold market

On 21 December 2017, the Department for Communities and Local Government released a formal response to its consultation aimed at tackling unfair practices in the leasehold market.

What has the Government confirmed it will achieve?

  • Prohibit new residential long leases from being granted on houses. The Government will bring forward legislation as soon as Parliamentary time allows, prohibiting new long residential leases from being granted on houses, whether new building or on existing freehold houses. Exceptions will apply which need clarifying, but it is acknowledged that where a developer doesn't own the freehold it will have to sell leasehold.  
  • Help to Buy on leasehold houses. The Secretary of State for Communities and Local Government has written to all developers to strongly discourage the use of Help to Buy equity loans for the purchase of leasehold houses in advance of new legislation.
  • Ground rents. Legislation will be introduced so that ground rents on newly established leases of houses and flats are set at a peppercorn (zero financial value).
  • Help consumers access justice. Provide leaseholders with comprehensive information on the various routes to redress available to them, including where their conveyancer has acted negligently. They will also work with the Law Commission to consider whether unfair terms apply when a lease is sold on.
  • Make it easier for leaseholders to be able to exercise their right to buy the freehold or extend their lease. The Government will work with the Law Commission and consult on introducing a prescribed formula that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs.  
  • Consider introducing a right of first refusal for house lessees. Aim to bring forward solutions by summer recess 2018 and new legislation when Parliamentary time allows.
  • Address the issue that leaseholders could be subject to a mandatory Ground 8 possession order (Housing Act 1988) if default on a payment were to occur, where ground rents exceed certain amounts, as they are technically classed as an assured tenant. The Government will take action to address this loophole in the 1988 Act and ensure that leaseholders are not subject to unfair possession orders.
  • Rights for freeholders who pay residential service charges. The Government will legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed use estate can access equivalent rights to leaseholders to challenge the reasonableness of service charges.

What is the proposed timetable?

The Government's proposals do not contain any timetable and refer to a number of the proposals being introduced 'as soon as Parliamentary time allows'.  Some proposals will involve further consultation and reviews by the Law Commission.

Our thoughts at this stage:

  • Tenants who believe they were miss-sold a leasehold house or onerous ground rent provision (e.g. doubling every five to ten years) may increasingly consult with developers and negotiate settlements with the Government's proposals in mind.
  • At least one major house builder has created a compensation fund and others in the sector are starting to follow suit, but that has not yet been copied by the entire sector.  Additionally, a number of companies which have previously acquired ground rents are approaching leaseholders offering to revise doubling ground rent clauses to link uplifts to RPI, but this is also not something which applies throughout the sector (yet).
  • We understand that claim management companies have already been busy touting for business from those affected and clearly do not need any encouragement, but a clearly defined redress scheme may take the wind out of their sails if it dispenses with the need for legal representation for those seeking compensation. This is something that property professionals and their PI Insurers should watch closely in the coming months as further details emerge.

It will be interesting to see how the residential market adjusts (if at all just yet) in light of these proposals but it is clear that developers, in particular, will be watching carefully for the draft legislation to see how it will affect the structuring of their new developments. The lack of certainty over timing and lack of fine print at this stage is to be regretted in terms of the immediate impact on sales of new build homes. Developers may be reluctant to change the structuring of schemes until the proposals have actually been implemented, but consumers who were already twitchy about leasehold houses and ground rents before the Government's response may force a change sooner rather than later, not wanting to commit to an asset which has been identified by the Government as undesirable thus impacting on resale value and the ability for owners to get a mortgage.

The full paper can be found here

Disclaimer:
This article is for information purposes only and does not constitute legal advice. It is recommended that the full paper is reviewed and that specific professional advice is sought through your usual contact at Michelmores before acting on any of the information given.