Consultation on leasehold reform is released

The government has released the long-awaited consultation on implementing reforms to the leasehold market.

This sets out the intention to make it unlawful to sell houses on a leasehold, rather than a freehold, basis, except in limited circumstances. However, the proposed £10 per annum limit on newly created ground rents is likely to have more of an impact on the market.

Will the sale of all leasehold houses be unlawful?

The consultation suggests some exemptions, for example shared ownership, community-led housing and houses on National Trust land. Outside these categories, once the legislation comes into force, the grant of a long lease of a house will be unlawful if:

• The land was held as freehold at any time; and
• The leasehold land was acquired from 22 December 2017 onwards (the day after the proposals were announced).

Hopefully clarification will be provided in due course. As it stands, developers who were bound to purchase leasehold property prior to 22 December 2017, but did not complete their purchase until after that date, could find that, unless they have completed any sales of leasehold houses before the legislation comes into force, they could be prevented from doing so.

The consultation also states that the "ban will also apply to assignments of leasehold land once the legislation is in force if a house or houses have been developed on that land after the legislation comes into force." Again, if developers wish to sell leasehold land on which leasehold houses have been built, they will need to do so before the legislation comes into force.

The consultation states that the relevant date is the date of grant of the lease. Therefore, if parties enter into a contract for the sale of a house on a leasehold basis prior to the legislation coming into force, they would be bound to complete this sale. However, if completion did not occur until after the legislation came into force, the sale would, it appears, be unlawful.

What about the cap on ground rent?

The consultation suggests a cap on ground rent for new leases of £10 per year. It is proposed that this comes into force three months after commencement of the legislation (which it is envisaged will come into force in 2020). There will, it is suggested, be some exceptions to this – retirement properties and mixed use leases. However, landlords should note that it is intended that the cap will apply to replacement leases, including where there is an implied surrender and re-grant because, for example, the extent of the demise is changed.

The consultation seeks views on whether there are justifiable reasons why ground rents on newly created leases should not be capped at a maximum value of £10 per annum, but instead at a different financial value. 

The consultation reports that the government has considered implementing ground rent as a percentage of between 0.1 and 0.15% of the value of the leasehold property. This had been suggested by some in response to the consultation on tackling unfair practices in the leasehold market. However, the consultation sets out that the government does not believe that this will result in a benefit to the consumer. The consultation also reports the industry view that stewardship and maintenance of apartment blocks may be affected if professional landlords are dissuaded from acquiring apartment blocks due to ground rents being set at a nominal level.

How will it be policed?

The consultation states that it will not be permissible to apply to register a long lease of a house, or with a ground rent above the statutory cap, with the Land Registry. Where a lease of a house is incorrectly granted, the consultation proposes that the homeowner should be able to cancel the lease and have the freehold transferred to it.

The consultation seeks views on how this would work in practice.

Is anything else covered in the consultation?

The consultation also welcomes views on how "house" should be defined. This links in to the current Law Commission consultation on the review of the enfranchisement legislation. However, the consultation acknowledges that introducing the concept of a "residential unit", instead of "house", as suggested by the Law Commission, is unlikely to be appropriate for the ban on selling leasehold houses.

The consultation suggests the introduction of legislation to ensure freeholders who pay charges for the maintenance of communal areas and facilities on private or mixed tenure estates have equivalent rights as leaseholders to challenge the reasonableness of service charges. While this is positive, in our experience, freeholders on such estates already have the same rights as leaseholders.

Finally the consultation asks for views on speeding up the process for the purchase of leasehold properties.

The consultation is open until 26 November. It will be interesting to see what responses the government receives. Limiting ground rent to £10 per annum could lead to an increase in house prices. This will not assist more of the population to become homeowners, and seems to run counter to the government's stated aim of extending home ownership .  

If ground rents are limited to £10, it remains to be seen whether the government assertion that the absence of a professional landlord will not have a negative stewardship impact on apartment blocks is correct.  The lack of a professional landlord will at the very least place the burden of managing the building onto apartment owners.  This is likely to result in backwards step - to the days of tenant-run management companies being set up and apartment purchasers being required to become directors of the management company.  Experience shows us that this can also result in issues going forward for apartment owners, especially if the management company directors do not keep abreast of their filing obligations at Companies House.

In addition, the limitation of ground rents to £10 will have a significant effect on those businesses that operate in the acquisition and collection of ground rent portfolios.