Member Briefing: Government to limit ground rents and ban sale of leasehold houses

Thu 21 December, 2017

Government to limit ground rents and ban sale of leasehold houses

Communities Secretary, Sajid Javid has today published the Government’s formal response to the consultation on leasehold abuses and announced that it will bring forward legislation to limit ground rents to a peppercorn level (‘zero financial value’) and introduce a ban on the sale of new houses with leases except in a limited number of circumstances. 

Legislation to take forward these reforms, and inform some of the detail currently still to be determined, will require time in the parliamentary calendar during 2018/19. 

HBF has already begun constructive discussions with contacts across government, with our attention now being on ensuring that the reforms ministers are proposing to improve transparency and fairness are practical, sensible and workable for developers and homeowners alike. Today’s announcement begins a process that will require legislation and is likely to take some time so while the direction of travel is now set, some of the detail is still to be determined. In particular, in this regard, our focus will therefore be on transition; minimising the impact on development viability where this is a concern; and ensuring that the future process for transfer, ownership and management of apartment buildings is clear and sensible for all parties, including homeowners, builders and mortgage lenders. 

The consultation, which ran from July to September this year, attracted 6,075 responses, 94% of which were from private individuals, the vast majority the owner or tenant of a leasehold house or flat. 

A summary of the Government’s response can be found below. The full document is available here

Ground rents 

Stakeholder responses to consultation 

Responding to requests from Government for information on the prevalence of ‘onerous ground rents’ and a definition of what could be deemed a ‘reasonable ground rent level’, there was agreement that anything affecting a property’s value should be classed as onerous, with some arguing that where ground rents exceeded either 0.1% or 0.5% of initial sales price, or where ground rents doubled more frequently than 10 or 15 years, this should be classed as onerous. 

HBF’s assessment that ‘the vast majority of ground rents are reasonable, fair and do not impinge on the long-term value or mortgageability of a home’ is quoted and the Government has acknowledged warnings made by respondents which pointed out the importance of retaining a role (and suitable financial interest) for an active freeholder. The role of ground rents in supporting affordability and viability of schemes, particularly retirement developments, has been acknowledged. 

Government response 

The Government has acknowledged the importance of ground rents for institutional investors, describing this income ‘as a perfect hedge against their liabilities’ while ‘allow[ing] developers to maximise their profits’. The response goes on: ‘However, consumers see no clear benefit from them [ground rents]’. 

Responding to arguments made by house builders and by institutional freehold investors, Government has stated that services and protections afforded to leaseholders by their freeholder should be paid for through charges levied as part of a service charge or a ‘marginally higher sales price’: 

‘The Government wants to ensure that consumers only pay for services that they receive. We will introduce legislation so that, in the future, ground rents on newly established leases of houses and flats are set at a peppercorn (zero financial value). Costs incurred by landlords for overseeing and appointing a managing agent, or carrying out wider services, can be recovered through the service charge or a marginally higher sales price. This will help ensure that costs are transparent and reasonable, with leaseholders having a right to challenge unfair service charges through the courts.’

(Government response, paragraph 69) 

In relation to existing leaseholders with ‘onerous ground rent’ terms, acknowledging efforts by builders and investors to address historical concerns, Government is encouraging the industry to ‘go further and faster’, extending support to ‘all those with onerous ground rents, including second hand buyers, and for customers to be proactively contacted’. 

To provide better information and assistance to all leaseholders, Government will work with the Law Commission to consider whether ‘unfair terms’ apply when a lease is sold on to a subsequent leaseholder and make it easier for leaseholders to exercise their right to buy their freehold. Solutions for lessees of houses will be prioritised and a consultation will be issued on the introduction of a prescribed formula ‘that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs’. 

Leasehold houses 

Stakeholder responses to the consultation 

The majority of respondents, including a majority of developers, agreed with the premise of the consultation, that in most cases it is not necessary to build and sell houses with leases. However, regional customs and specific examples were highlighted, including where there were shared grounds or facilities. It was also highlighted that this practice had increased in recent years as a result of local authorities’ reluctance to adopt common parts. 

Developers, and others, argued that leasehold was necessary in these cases to ensure contributions were made towards the upkeep of shared spaces and services. Others pointed out that there were other mechanisms to achieve this including commonhold, an estate rentcharge or the use and effective transfer of positive and/or restrictive covenants. Concerns about the impact on housing supply were raised during the consultation process through a possible impact that a ban could have on the availability of leasehold land where landowners do not want to sell the freehold. Viability was also raised with the importance of freehold investment from institutional investors highlighted as a form of development finance. This view however, was not shared by many lenders and housing practitioners who argued that that while there would not be an impact on supply but that prices may go up, having implications for affordability. Representatives of developers, including HBF, mentioned that it could affect the nature of new schemes, with developers potentially being more reluctant to bring forward sites with significant communal space or facilities. 

Issues with the current definition of a ‘house’ were also raised by some respondents with significant ambiguity in current law. 

Government response 

Echoing comments made by the Secretary of State on many occasions, the Government’s response state that the sale of leasehold houses ‘has got to stop’: 

This has got to stop. We will bring forward legislation as soon as Parliamentary time allows to prohibit new residential long leases from being granted on houses, whether new build or on existing freehold houses. It will still be possible for existing leaseholders to extend their lease, or purchase the freehold, and we will consult on proposals to support leasehold houseowners to do this on more favourable terms. We will ensure legislation clearly defines “new build” and what a “house” is to avoid any unintended consequences.

(Government response, paragraph 38) 

On land that is currently subject to a lease, developers will still be able to build and sell leasehold houses on that land, but legislation to ban the sale of leasehold houses will apply to land that is not subject to an existing lease from today, 21 December 2017. Government has committed to work with the sector and others to consider cases for exemptions to the ban on leasehold house sales. 

The Secretary of State’s previous robust statements on the practice of selling leasehold houses with Help to Buy support have also been reiterated in the response. While it is not possible to impose a requirement on developers to stop building leasehold houses under existing contracts, the Secretary of State has today written to developers to ‘strongly discourage’ the use of Help to Buy Equity Loans for the purchase of leasehold houses in advance of the legislation referred to above.  

Future issues and commonhold 

In response to the general questions posed at the end of the original consultation, the Government has announced it will look at ways to ‘reinvigorate commonhold’. To do so, Government will work with those in the house building industry and mortgage lenders to address current weaknesses in the commonhold model. 

David O’Leary

Policy Director