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Government announces new measures for the leasehold sector

Robert Brown considers an announcement from the Department for Communities and Local Government that new measures will be brought forward to tackle what are considered to be “unfair and abusive practices within the leasehold system”.

The announcement comes as the Government publishes the summary of consultation responses and the Government’s response to the recent consultation on ‘Tackling unfair practices in the leasehold market’. The consultation paper was published in July 2017. In that paper, questions were posed on the following issues.

“i) Prohibiting the sale of new leasehold houses (with possible exceptions where developers are obliged to sell a house on a leasehold basis.)

ii) Possible changes to the Help to Buy scheme in relation to leasehold houses.

iii) Limiting the starting value and increase of ground rents on all new residential leases over 21 years.

iv) Updating Ground 8 of the Housing Act 1988 so long leases over 21 years with an annual ground rent over £1,000 in London and £250 outside of London cannot be an Assured Tenancy.

v) Providing freeholders on private estates with equivalent rights to leaseholders to challenge the reasonableness of service charges via the First-tier Tribunal (Property Chamber).

vi) Areas for future leasehold reform.”

In the announcement made on 21 December 2017, the DCLG says that measures to be introduced will include

“* legislating to prevent the sale of new build leasehold houses except where necessary such as shared ownership

* making certain that ground rents on new long leases – for both houses and flats – are set at zero

* working with the Law Commission to support existing leaseholders and make the process of purchasing a freehold or extending a lease much easier, faster and cheaper

* providing leaseholders with clear support on the various routes to redress available to them

* a wider internal review of the support and advice to leaseholders to make sure it is fit for purpose in this new legislative and regulatory environment

* making sure freeholders have equivalent rights to leaseholders to challenge unfair service charges”

The Government’s consultation response gives some further detail on these proposed measures.

First, so far as the ban on new leasehold houses is concerned, the Government says this.

“38. … 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…

“39. … [W]e believe that an exemption will be needed to support shared ownership, and may also be needed for some Community Land Trusts, or other specific developments. We also understand that where land is currently subject to a lease it will not be possible to build freehold houses. Where land is currently subject to a lease, developers will continue to be able to build and sell leasehold houses on that land. However, the Government will ensure that future legislation to ban the sale of leasehold houses applies to land that is not subject to an existing lease at the date of publication of this consultation response.

“40. We will continue to work with the sector and other partners to consider the case for exemptions to the policy and its retrospective application, in particular to mitigate any undue unfairness. In bringing forward legislation we will consider further if there are particular cases where leasehold houses can be justified and, if they can, we will work with sectoral partners to ensure that they are provided on acceptable terms to the consumer.”

Moving on to Help to Buy, the Government says that

“47. We do not think it is appropriate for Help to Buy to support the sale of leasehold houses. It is not possible to impose a requirement on developers to stop building leasehold houses under existing contracts, but we expect developers to work with us to take forward this change. The Secretary of State for Communities and Local Government has written to all developers to strongly discourage the use of Help to Buy equity loans for the purchase of leasehold houses in advance of new legislation. We will be keeping a close eye on progress.”

Ground rents have become an increasingly contentious issue. The Government has resolved to take action.

“69. 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. We will make sure that these proposals do not interfere with shared ownership schemes, which are specifically designed to support affordable ownership.

“70. We will also consider how we can support existing leaseholders. A number of developers have introduced schemes to compensate individuals, but these must go further and faster. The Government wants to see this support extended to all those with onerous ground rents, including second hand buyers, and for customers to be proactively contacted. We will be keeping a close eye on progress and will consider measures that could be pursued to take action if necessary.

“71. This alone will not address all the abuses that have occurred, with some consumers reporting that they were mis-sold a leasehold house, or that their conveyancer acted negligently. It is right that individuals are compensated where compensation is due. To help consumers access justice we will work with the 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. We will also work with the Law Commission to consider whether unfair terms apply when a lease is sold on to a new leaseholder. This will help resolve the current ambiguity around this, and provide better protection for leaseholders.

“72. We also want to make it easier for leaseholders to be able to exercise their right to buy their freehold, or extend their lease, and for this right to be available as soon as possible. The Government will prioritise solutions for lessees of houses. We will work with the Law Commission on this and consult on introducing a prescribed formula that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs. And we will also consider introducing a Right of First Refusal for house lessees. We will aim to bring forward solutions by summer recess 2018 and new legislation when Parliamentary time allows. In doing this we will work with UK Finance to encourage lenders to assist consumers wanting to purchase their freehold.”

In section 4 of the consultation response, the Government suggests that it will amend Housing Act 1988 so as to ensure that Ground 8 cannot be used by landlords against long leaseholders.

“75. The Government is aware that, where ground rents exceed £250 per year or £1,000 per year in London, a leaseholder is classed as an assured tenant. This means, for even small sums of arrears, leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent. The Government will take action to address this loophole and ensure that leaseholders are not subject to unfair possession orders.”

It is not clear if this will be done by amending Ground 8 itself, by amending Sch.1, para.3A, or by some other amendment.

Next, the Government proposes two measures for freeholders.

“80. The Government will legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed use estate can access equivalent rights as leaseholders to challenge the reasonableness of service charges.

“81. We will also ensure that, where a freeholder pays a rentcharge, the rentcharge owner is not able to take possession or grant a lease on the property where the rentcharge remains unpaid for a short period of time.”

In the final section of the consultation response, the Government also outlines some other aspirations.

“86. … We will work with the Law Commission to consult on introducing a simple prescribed formula to help owners enfranchise or extend their lease, while also ensuring fair compensation to the landlord. And we will look tointroduce a minimum lease term for new long leases on flats to protect consumers from added costs where their leases fall under 80 years.

“87. We also want to look at ways to reinvigorate commonhold. One of the reasons commonhold was not successful when first introduced was because of the financial incentives for developers in building leasehold. The measures we outline in this response will help address this by removing unfair financial gains, but there are other issues that we need to consider including access to finance, and consumer awareness. This will help ensure that the market puts consumers’ needs ahead of those of developers or investors. We will also look at what more we can and should do to support commonhold to get off the ground working across the sector, including with mortgage lenders.”

(all emphases in quotations from the consultation response in the original)

Much of what has been proposed will take some considerable time to implement and, even then, may not make much difference for existing leaseholders. Nonetheless, coupled with the Law Commission’s announcement that it will be looking at Residential Leasehold (generally) and at Unfair Terms in Residential Leasehold as part of its 13th Programme of Law Reform, it is beginning to look a lot like Chr…, sorry, a lot like significant and substantial leasehold reform is on the cards.

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