To lease or not to lease, that is the question

The government has recently sought views on their leasehold reform proposals, to which Kennedys have provided a response. The proposals envisage tackling unfair practices by introducing legislation to prohibit new residential long leases and to restrict ground rents in newly established leases of houses and flats to a nominal amount.

The proposals are intended to provide the fairest options for consumers and to end bad behaviours which, in some instances, have seen the amount claimed doubled at each review date. Whilst the proposals are clearly well-meaning, they appear to offer opportunities to game the system and fail to appreciate that although the use of a leasehold may sometimes be driven by a desire to maximise revenue streams, there are benefits to consumers.

Background

Leasehold can be an effective tool for multiple-ownership buildings such as blocks of flats. However, over recent years new houses have increasingly been built as leaseholds. Where there are no shared facilities this can seem unnecessary and driven only by a desire to increase revenue streams by ground rent charges for those who own the freehold, which it is estimated averages £371 per annum for a new build.

In December 2017, the government announced that it will bring forward legislation to tackle what they view as the exploitation of homeowners. On 15 October 2018, the government opened its consultation into those proposals, which closed on 26 November 2018.

Leasehold reform

The government’s key proposed changes are:

  • An enforceable ban on unjustified new leasehold builds for houses (exceptions apply)
  • A cap on future ground rents of £10 per annum
  • Measures to ensure service charges are fairer and more transparent
  • Measures to improve how new leasehold properties are sold.

The government has confirmed that where land is currently subject to a lease, developers will be able to continue to build and sell leasehold houses on that land. However, the ban will apply to any leasehold land acquired from 22 December 2017.

Comment

The Land Registry will have primary responsibility for enforcing the proposed ban on unjustified new leasehold builds by preventing the registration of any leases. However, if a lease cannot be registered, the buyer will only acquire an equitable title to the property (as legal title only passes on registration) which places the buyer and any mortgagee in temporary limbo and therefore at risk.

A further concern is that the proposals will only to apply to new leaseholders. This will likely make existing leasehold houses or residential long leases with escalating ground rents much less attractive and could potentially impact on the value of those properties, making the situation worse, not better.

Surveyors involved in valuation of leasehold properties will also be impacted by the reforms. If those properties become less valuable because freehold interests in similar properties are available, leaseholders and lenders in possession may consider professional indemnity claims against surveyors on grounds of alleged over-valuation. This is particularly relevant in relation to valuations performed since the government proposals were first made in 2017.  Surveyors should therefore be aware going forward that this could be an issue, and should take the pending reforms into account.

Another concern is the exceptions to the ban. The paper recommends that mixed-use schemes, community-led housing, retirement properties, mixed use leases and replacement leases be exempt from limiting ground rents to a nominal sum.  The consultation paper frequently refers to the desire to avoid the misuse of exemptions, yet the exception of mixed-use premises opens up a possible loophole where the residential and commercial areas of a building are let by a single lease.  However we would anticipate that any residential space would often be let separately to commercial space, which would avoid the exception being misused.

There is no firm timetable as to when legislation may be introduced; the consultation paper suggests the government will provide their final report in 2019 with a view to implement changes mid-2020. However, the government has confirmed that the changes will affect all builds from 22 December 2017. Therefore, any schemes based on new builds being sold as leaseholds – and any surveys of those properties – should be treated with caution.

Read other items in Professions and Financial Lines Brief - December 2018

Read other items in Commercial Brief - January 2019