The Communities Secretary, Sajid Javid has published the government’s long awaited consultation on the leasehold market with the objective of ‘tackling unfair practices’ as they relate to both leasehold houses and flats.
The 34 page consultation seeks views on:
Prohibiting the sale of new leasehold houses except where developers are obliged to sell houses on a leasehold basis
Changes to the Help to Buy scheme to ensure new leasehold houses are sold on fair terms
Fair ground rent terms for leasehold flats and houses
Technical changes to the Housing Act 1988 to prevent long leaseholders being treated as Assured Tenants
Providing freeholders on private estates with equivalent rights to leaseholders
Further suggestions for leasehold reform
Background and political context
The publication of the consultation paper follows a long period of media and political interest in the sale of leasehold houses in particular. This gained traction in 2016 with stories about rent reviews in some leases involving doubling of the annual ground rent but quickly turned to concerns about other aspects of the leasehold market, including event fees, the cost of purchasing freeholds and the basic principle of selling new houses with leases rather than on a freehold basis. Calling the practice ‘practically feudal’, Sajid Javid has said ‘I don’t see how we can look the other way’. At the HBF Policy Conference in March, he expanded upon this, saying:
‘I will look to ensure Help to Buy Equity Loans are only used to support new build houses on acceptable terms. This will send a serious message to the building industry: if you want the Government to help you build and sell homes, you have to sell them on fair terms.’
The Housing White Paper, Fixing Our Broken Housing Market, published in February, committed the Government to a consultation on the ‘abuses’ in the leasehold market. Several weeks later the Prime Minister was questioned by MPs on the ‘rip off’ practice of selling houses with leases. In response she said that other than in exceptional circumstances she did not see why new houses ‘should not be built and sold with the freehold interest at the point of sale’. Subsequently, all of the main political parties included within their recent election manifestos a pledge to tackle the issue, with the Conservative manifesto stating that the Party would ‘crack down on unfair practices in leasehold’.
Limiting the reservation and increase of ground rents on all new residential leases (flats and houses)
The paper highlights recently publicised examples of leasehold terms which are deemed unfair by Government and references the returns available to developers when selling on freehold interests and the expansion of the market for ground rents in recent years. The ‘monetisation’ of ground rents has, it is claimed, led to abuses of the leasehold system.
The Government is inviting views on limiting ground rents in new leases of more than 21 years (new builds and new leases where a lease has expired). While ministers are minded to introduce measures to limit ground rents in new leases to start and remain at ‘peppercorn’, they also want to explore other means by which fairer ground rents could be achieved. In this regard, the recent change in policy by Nationwide (maximum starting rent of 0.1% of property value, no lending on properties where ground rents double every 15 years or more frequently and minimum lease lengths of 125 for flats and 250 years for houses) is mentioned.
Views are also sought on the position of existing leaseholders with ‘onerous’ ground rents, potentially through formal consumer redress mechanisms.
What information can you provide on the prevalent of onerous ground rents, i.e. the number and type of onerous ground rents and whether new leases are still being sold with such terms?
What would a reasonable ground rent look like in terms of (i) the initial annual ground rent, (ii) the maximum rate of increase in annual ground rent, and (iii) how often the rate of increase could be applied to an annual ground rent?
Should exemptions apply to Right to Buy, shared ownership or other leases?
Would restrictions on ground rent levels affect the supply of new build homes?
How could Government support existing leaseholders with onerous ground rents?
In addition to legislation what voluntary routes might exist for tackling ground rents in new leases?
Limiting the sale of new build houses
The main body of the consultation does not reference a complete prohibition of the sale of leasehold houses but asks for suggestions on how to limit the sale of new build leasehold houses and how and when exceptions should apply.
The consultation document explores specific instances where houses are sold with a lease. These include on Crown land, sites within a cathedral precinct, on land owned by local authorities, where the houses are in shared ownership, garden villages or specialist retirement developments. The paper deals with the greater prevalence of leasehold houses in the North of England and acknowledges that in some parts of the country leasehold is the default tenure for new build houses, but notes that the practice is not limited to these parts of the country and that of the 1.2 million leasehold houses in England, ‘some have no shared services or facilities, and there appears to be no obvious reason why the freehold is not sold at the point of sale’.
The government states that it is not clear that any ‘leasehold discount’ is being fully passed on to the consumer. The transfer of freehold interests to third parties is not deemed by government to be in the interests of consumers, particularly where the leaseholder is then faced with significant legal and surveyor costs when attempting to purchase the freehold. The counter argument that restrictions on the ability to sell freehold interests to third parties will result in increased house prices, but this position is dismissed by the government as unconvincing.
What steps should the Government take to limit the sale of new build leasehold houses
What reasons are there that houses should be sold as leasehold?
Are any of the Government’s exceptions not justified?
Would limiting the sale of new build leasehold houses affect the supply of homes?
Reducing Help to Buy support for leasehold houses
The Government intends ‘to remove as far as possible Help to Buy Equity Loan support on new build houses where these are sold as leasehold’ with limited exceptions. In cases where leasehold houses can be justified, Help to Buy support would only be available if the ground rent terms are reasonable.
Should the Government remove support for the sale of new build leasehold houses through Help to Buy, unless leasehold can be justified and where ground rents are reasonable (which could be a nominal or peppercorn rent)? If not, why not?
In what circumstances could leasehold houses supported by Help to Buy be justified?
Is there anything further the Government could do through Help to Buy to discourage the sale of leasehold houses?
What measures, if any, should be considered to minimise the impact on the pipeline of existing developments?
Exempting leaseholders potentially subject to ‘Ground 8’ possession orders
Currently where ground rents exceed £1000 per year in Greater London and £250 per year elsewhere in England, leases are classed as an assured tenancy under the Housing Act 1988. This is an unintended consequence of the legislation and gives the landlord (freeholder in this case) mandatory grounds of possession in the case of three months’ rent arrears (Ground 8). The Government is inviting views on amending the Housing Act 1988 (as amended by the Housing Act 1996) to remove the powers of landlords to seek a ‘Ground 8’ possession order against a leaseholder.
Should the Government amend the Housing Act 1988 to ensure a leaseholder paying annual ground rent over £1000 in London and £250 elsewhere in England is not classed as an assured tenant?
Service charges for maintaining communal areas and facilities on freehold and mixed tenure estates
On private estates that include both freehold houses and leasehold flats where all households are expected to pay for the maintenance of communal areas and facilities, freeholders may not have the same rights that leaseholders do under the terms of their leases and through statute. In particular, freeholders may have fewer rights to challenge the reasonableness of service charges through First-tier Tribunals despite paying the same amounts for the same services and facilities as their leaseholder counterparts.
Should the Government promote solutions to provide freeholders equivalent rights to leaseholders to challenge the reasonableness of service charges?
The consultation is the first step in promoting transparency and fairness for leaseholders, but the work will continue with the intention for a ‘wide ranging project’ looking at improving commonhold, the role of managing agents, other leasehold terms and enfranchisement.
What further areas of leasehold reform should be prioritised, and why?
The consultation is available to view here. Submissions are required by Tuesday 19 September. If you would like to inform HBF’s submission please email firstname.lastname@example.org by Tuesday 5 September.
Home Builders Federation
London, SE1 9PL
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