Government to crack down on 'unfair and unreasonable' leasehold terms in England

Out-Law News | 26 Jul 2017 | 3:35 pm | 2 min. read

Leasehold arrangements on new-build houses in England could be banned and ground rents substantially reduced, under government plans to crack down on "unfair and unreasonable" leasehold terms.

Its consultation, which closes on 19 September 2017, proposes limiting ground rents to "as low as zero" in some cases, to ensure that they relate to real costs incurred. Leaseholds for new-build houses could be banned in all but "a few exceptional circumstances", such as houses in shared ownership or those that are built on land with specific restrictions.

The government pledged to take action on unfair and unreasonable abuses of leaseholds in its white paper on housing, published at the start of the year. The proposals come alongside the recent growth in sales of leasehold houses, as well as significant increases in ground rents.

Communities secretary Sajid Javid said that the proposals would "help make sure leasehold works in the best interests of homebuyers now and in the future". He cited examples of homeowners being charged £1,500 by a leaseholder before they could make alterations to the property, and of family homes in which the ground rent was expected to hit £10,000 annually by 2060.

However, property law expert Simon Gardiner of Pinsent Masons, the law firm behind, said that the government would have to be careful to safeguard the "perfectly legitimate reasons" why houses might be sold as leaseholds.

"A virtual ban on new houses being sold on long leases is one way of preventing perceived abuses of the system by developer landlords, but there is a real risk of throwing the baby out with the bath water here," he said.

"As the consultation acknowledges, there are perfectly legitimate reasons why houses might be sold as leaseholds and any change in the law will need to safeguard these. Retirement villages are highlighted as an example of this, where 'event fees' allow residents to defer service changes until their property is sold. However, the use of leases is a long established tool of estate management generally, and can be particularly useful for developments with a mixture of houses and flats where alternative structures for the enforcement of covenants and recovery of estate charges from freeholders can prove cumbersome," he said

"Privately maintained estates are increasingly common, so it will be interesting to see how the industry responds," he said.

Under the leasehold system, property owners own their homes for a fixed period of time, usually for many decades. Leaseholders pay an annual ground rent to the freeholder of the property, which usually increases at a rate set by the freeholder. In recent years, ground rents have increased significantly, in some cases doubling every 10 years, according to the government.

Leaseholds have traditionally been used for flats with shared spaces. However, of the four million private sector residential leasehold properties recorded in England in 2014/15, 1.2 million were leasehold houses, with much of this growth happening in the north west of England, according to the government.

The consultation also proposes changing the rules around the Help to Buy equity loan scheme so that the loans can only be used to purchase new-build houses on "acceptable" terms, and making changes to the 1988 Housing Act to exempt long leaseholders who fall behind with ground rent payments from the fast-track possession procedure.

Once ground rents increase above a certain threshold, the lease can be classed as an "assured tenancy" under the Housing Act. This gives the freeholder the right to seek a court order to end occupancy and attempt to evict the tenant without the tenant being able to apply for relief; something which the government sees as an "unintended and unfair consequence" of increasing ground rents.

"The government is considering amending the [Housing Act] to exempt leaseholders from legislation that was intended to ensure that assured tenants in the private rented sector do not build up rent arrears," it said in the consultation.