Out-Law Analysis | 08 Aug 2017 | 10:07 am | 3 min. read
The government is right to tackle some of the "unfair and unreasonable" leasehold terms it rightly identifies in its recent consultation on the subject. But instead of banning new leasehold arrangements outright, a more proportionate approach through regulation would allow for the continued use of leasehold structures where homeowners need to be able to easily contribute to the cost of providing shared services that benefit their homes.
The need to set up estates service charges has become increasingly common in recent years, to pay for the maintenance of open spaces, play areas, community buildings and communal facilities associated with new housing developments. The tightening of local authorities' purse strings has led to some reluctance to adopt these as public facilities, while in other cases high maintenance charges imposed by local authorities have encouraged developers to seek their own solutions.
While the leasehold model is not the only way of setting up an ongoing estate management charge, it is cheaper and administratively simpler than the alternatives - while ensuring that future purchasers remain bound by the arrangements and do not face unexpected bills for repairs and maintenance in the future. The model also offers protections to both homeowners and developers: variable estate charges are caught by the statutory service charge regime introduced by the 1985 Landlord and Tenant Act, protecting leaseholders against excessive service charges, while enforcement of an unpaid estates service charge under a leasehold structure carries less risk for developers.
The government's consultation recognises the need for exceptions should it press ahead with a general prohibition on new-build leasehold houses - for example, for garden villages, retirement schemes and new homes built on land with specific restrictions attached. But these do not seem wide enough to cover schemes where developers need to set up an estates service charge in order to cover the future costs of maintaining the estate.
The press release released on the consultation also hinted at an exception to the ban where there are shared services, but this has not been followed through in the detail of the consultation itself.
There is no denying that the leasehold model has some problems. The increasing level of ground rents, in particular through the use of disproportionate rent review mechanisms, should quite rightly be tackled, along with the knock-on effect this can have on the cost of extending the lease or buying the freehold to the property under the leasehold enfranchisement process. Despite unhelpful and misleading press coverage to the contrary, the latter is rarely the fault of unscrupulous developers - rather, higher ground rents have led to higher premiums under both scenarios once the statutory formula used to calculate the premium is applied.
Tackling these problems should not require an outright ban on leasehold structures where these are necessary, either for one of the reasons currently proposed by the consultation paper or where homeowners need to contribute to the cost of shared services. Instead, restrictions should be applied to the use of ground rent review provisions with the effect of keeping ground rents at commercially sensible levels, while solicitors acting for buyers could be subject to stricter requirements to ensure that prospective homebuyers properly understand the implications of their leasehold purchase.
The government could also consider requiring developers to offer buyers a choice to purchase the leasehold or the freehold of a house, where a leasehold structure is not necessary but the developer still wishes to use one. This would obviously allow for a price difference between the two, reflecting the difference in value between the leasehold and freehold interests in the house. The government could also require developers to provide prescribed information to buyers concerning the differences between buying a leasehold or freehold house as part of their sales pack.
New requirements along these lines would more than address the government's concerns, whilst enabling developers and homeowners to continue to benefit from the advantages of using a leasehold structure. It would also help to keep new homes more affordable than if they were to be sold on a freehold basis - something that the government has identified as one of its biggest priorities.
The consultation will close on 19 September.
Nicola Buchanan and Nicola Charlton are property disputes experts at Pinsent Masons, the law firm behind Out-Law.com.