Teal blue header image

Houses must be sold as freehold

Just before Christmas, the Government confirmed its intention to make it unlawful to sell houses on a leasehold basis. It has also committed to introduce legislation so that new leases have only a peppercorn ground rent.

This move is clearly to combat negative press comment about tenants that have paid a substantial premium for their long leasehold interest, being hit by ground rents that increase (sometimes substantially) over time.

So what changes are we likely to see in 2018 and will these have any real impact on the housing sector?

Sale of houses on a leasehold basis

As anticipated, the Government committed to outlaw the sale of houses on a leasehold basis. Very limited exceptions are likely to apply.  But, one would be where the developer's interest was subject to a lease at the date of the consultation response (21 December 2017).

Obviously if the developer only has a leasehold interest itself, it cannot transfer the freehold to the purchaser. The 21 December 2017 deadline for the leasehold interest to be in place is there to ensure that developers do not rush to restructure their property interests so that they can continue to grant leases of houses rather than transferring the freehold.

Onerous ground rents

The Government has pledged to introduce legislation so that new leases of houses (where such leases are not prohibited) and flats will have a peppercorn ground rent.

In our experience, increases in line with RPI are generally viewed in the market as a fair and reasonable standard, and have formed part of developers' business models; the sale of the ground rent being a perfectly legitimate route to additional income.

However, recently lenders have been introducing restrictions on what they consider acceptable in terms of increases in ground rent. Whilst it does not make sense for developers to include provisions in leases that will be rejected by lenders, prescribing that ground rents must be a peppercorn is likely to lead to an increase in house prices to compensate for the absence of ground rent income.

The Government has indicated that it will investigate what can be done to help those with existing leases that contain onerous ground rent provisions. What is termed an "onerous" ground rent is, however, not clear. It will be interesting to see how the Government frames this in relation to existing leases containing ground rents.

The consultation response does set out the Government's view that compensation schemes (such as those already introduced by some developers) must go further and faster. Such support should be extended to all those with onerous ground rents, including second hand buyers. Customers should also be proactively contacted.

Clearly it would be a challenge for the market if the reforms resulted in a two-tier system of properties with peppercorn ground rents and those with a more typical ground rent of a few hundred pounds per year.

Changes to the current position will also have a significant effect on those businesses that operate in the acquisition and collection of ground rent portfolios.

Maintenance of communal areas and facilities

The Government will legislate to ensure that freeholders paying charges for the maintenance of communal areas and facilities on a private or mixed use estate have rights equivalent to those of leaseholders to challenge the reasonableness of service charges.

Whilst this is a positive move, in our experience freeholders on such estates are already afforded the same rights as leaseholders. Therefore, it is not likely to change current market practice.

Possession under Ground 8 of the Housing Act 1988

The way the Housing Act 1988 is currently drafted means that a long lease subject to a ground rent of more than £1000 per year in Greater London and more than £250 per year elsewhere is classed as an assured tenancy.

This means that if the ground rent remains unpaid, the landlord can bring proceedings to terminate the tenancy. This could lead to a homeowner, who has paid a substantial premium for their leasehold interest, having the lease terminated. If this happens, the lender is left without any security.

The issue is currently tackled by the inclusion of a mortgagee protection clause in the lease. Whilst this satisfies most developers, and provides protection to lenders, the Government's intention to amend the legislation to make it more fit for purpose is welcomed.

The consultation response states that "The Government will take action to address this loophole and ensure that leaseholders are not subject to unfair possession proceedings." However, it is not clear how this will be done.

Amending the definition of assured tenancies in the Housing Act 1988 could affect other legislation. For example, assured tenancies are within the scope of The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (commonly known as the MEES Regulations).

Amending the definition could take some tenancies outside the scope of the MEES Regulations. Those amending the definition of assured tenancies will need to consider the impact on other legislation carefully.

The wider picture for tenants in the private rented sector

The response to the consultation on tackling unfair practices in the leasehold market is part of a wider move to improve the position of tenants.

It was followed, shortly after Christmas, with the release of responses to the consultation on proposed banning order offences under the Housing and Planning Act 2016 and the consultation on Houses in Multiple Occupation and residential property licensing reforms.

Banning orders for rogue landlords and agents, and a database of rogue landlords and property agents, are expected to be brought in on 6 April 2018. Secondary legislation on houses in multiple occupation will also be brought in this year.

2018 looks set to be a year for improving conditions for tenants in the private sector.

Contributor: Alexandra Holsgrove Jones

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Insights & events View all