Residential leasehold: will good intentions lead to good law?

by Dentons
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In 2017 the Department for Communities and Local Government launched a consultation on "tackling unfair practices in the leasehold market" (see our related update). The government has now issued its response to the feedback from that consultation, outlining a number of significant proposals for reform of residential leasehold in England.

Ban on the sale of new build leasehold houses

The headline proposal for reform is the government's declaration that it 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". Note that:

  • the ban is on new leases; it does not affect existing leases already granted;
  • the ban relates to houses only – the government promises to ensure that the legislation clearly defines both "new build" and "house"; however, it is likely that, whatever definitions are used, there will be a degree of ambiguity;
  • where land is currently subject to a lease, the government expressly confirms that "developers will be able to build and sell leasehold houses on that land". However, anti-avoidance legislation will be introduced to limit this exception to land that was subject to a lease as at the date of the government's response (21 December 2017) – we wait to see whether this will also exempt land that was subject to an agreement for lease or option to create a leasehold interest which subsisted at this date;
  • the government does not commit itself to providing any exceptions to the ban but does acknowledge that it will still consider possible exemptions, for example, to support shared ownership and possibly for some Community Land Trusts. As such, there is still time for parties to lobby the government for an exemption though any concession is likely to come with limitations on the terms on which new leaseholds are provided to consumers.

While the use of leasehold rather than freehold may sometimes be driven by a desire to maximise revenue streams, that is not always the case. It is widely acknowledged that it is far easier to set up a workable scheme for the maintenance of common parts, facilities and mutual obligations when using leasehold since, as the law currently stands, it is more difficult to pass on positive obligations within a freehold scheme. As such, it is vital that the government, when pressing through these reforms, also presses through the related reforms of freehold covenant law (as proposed by the Law Commission) and commonhold to ensure that developers have a practical means of managing communal matters and delivering the much needed residential development the government is so keen to procure.

Limiting ground rents to a peppercorn for all new residential leases over 21 years

While ground rents offer clear financial benefits to institutions and developers, the government can see no benefit to the consumer. As such the government is to introduce legislation to limit ground rents on newly established leases over 21 years of houses and flats to a peppercorn (zero financial value).  Provision is to be made to ensure that this change does not interfere with shared ownership schemes.

The restriction will not apply to existing leases; however, the government is still keen to help existing leaseholders through the following measures:

  • encouraging developers to extend compensation schemes and support to existing leaseholders with onerous rents (or rent reviews) including second hand buyers. Developers are expected to proactively contact affected parties and if insufficient steps are taken the government may take further action. One issue is that the response does not clearly identify what the government considers to be an onerous ground rent for existing leases. The fact the government wants to limit new ground rents to a peppercorn suggests that the threshold will be set quite low; however, the industry would surely welcome a clarification of this point;
  • working with the existing redress schemes and Trading Standards to provide leaseholders with "comprehensive information on the various routes to redress available to them, including where their conveyancer has acted negligently";
  • getting the Law Commission to consider:
    • clarifying the law relating to unfair terms when a lease is sold – currently only the original leaseholder can challenge a lease under the unfair terms law; and
    • making it easier for leaseholders to exercise their right to buy their freehold or extend their leases (see below);
  • introducing a right of first refusal for house lessees. The equivalent right of first refusal for flat lessees is set out in Part I of the Landlord and Tenant Act 1987, the drafting of which was once described as "ill-drafted, complicated and confused"1. We have to hope that any attempt to replicate rights of first refusal for freeholders will be more successful.

Making it easier for leaseholders to enfranchise

The government has outlined in its response a desire to make it easier for leaseholders to exercise their right to buy the freehold, or indeed extend their lease and for this right to be available as soon as possible.

To facilitate this, the government has pledged to work with the Law Commission to consult on introducing a prescribed formula to work out what the leaseholder is to pay to enfranchise, with a view to also save the leaseholder incurring additional court costs. They will also seek to work with UK Finance to encourage lenders to assist with finance options for leaseholders wanting to acquire the freehold of their property.

Other proposals and issues

The government's response outlines a number of other proposals and issues, namely:

  • the government does not think it is appropriate for Help to Buy to be used to support the sale of leasehold houses. The Secretary of State for Communities and Local Government has written to developers to "strongly discourage" the use of Help to Buy equity loans for the purchase of leasehold houses in advance of new legislation;
  • taking action to ensure that where ground rents exceed £250 per year or £1,000 per year in London the leaseholder is not classed as an assured tenant and therefore cannot be issued with a mandatory possession order for ground rent arrears (see our original update for more details);
  • legislating to provide freeholders equivalent rights to leaseholders to challenge the reasonableness of service charges levied for the maintenance of communal areas and facilities;
  • changing the law so that rentcharge owners are not able to take possession or grant leases on the property where the rentcharge remains unpaid for a short period of time;
  • considering the introduction of a minimum lease term for new long leases on flats – no further details are provided; and
  • reinvigorating commonhold.

This is in addition to the government's ongoing projects to professionalise managing agents, ensuring landlords are signed up to redress schemes and modernising the home buying process.

Commentary

The government clearly has good intentions for reforming residential leasehold law in England; however, the concern has to be whether those good intentions can, and will, translate into good law. While the broad aims of the government's strategy, such as the ban on new-build leasehold houses, are clear, the details are not and that could be a problem. Developers will need clarity, not only to plan future developments but also to handle the completion of existing schemes and that is what is lacking. Even if the government brings forward legislation quickly to implement the key changes that may not be enough. As acknowledged in its own response, in order to tackle the issues identified with residential leasehold law, the government needs to go much further and address much wider issues such as freehold covenants and commonhold suggesting that reform in this area is a longer term project.


[1] Sir Nicholas Browne-Wilkinson VC in Denetower Ltd v. Toop [1991] 1 WLR 945

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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