17 January 2018

The Death Knell of Leasehold Home Ownership?

Following the recent publication of the Government’s response to its consultation on tackling unfair practices in the leasehold market, Rosemary Edwards, Head of Residential Development, shares her view of the industry’s hot topic:

The sale of leasehold homes has recently been surrounded with controversy. There is an element of risk for homeowners purchasing a property with a leasehold agreement by nature of the fact they have very limited control over the future ownership of the freehold. There have been some headline-raising cases of private investors acquiring freeholds from property developers and owners and then seeking to charge home owners exponentially higher ground rents.

The issue has attracted media attention and led many key players within the property industry to demand change. Consequently, the Government launched a consultation to review the situation, the response to which was published in December. The key features of the response were:

  • Other than in exceptional circumstances, the Government considers that there is no good reason for new build houses to be sold on a leasehold basis;
  • A stated intention to ban the imposition of ground rents on new leases of houses or apartments;
  • A clear intention to make it easier for owners of existing leasehold houses to acquire their freeholds;
  • An indication that legislation will be introduced to provide freeholders who pay management or service charges with the same rights as leaseholders to challenge the reasonableness of such charges

The Government consultation elicited 5,668 responses of which 94% were from private individuals. I can’t help but feel that the proposed changes are being driven by a kneejerk reaction to some extreme examples of unfair practices.

There are undoubtedly some issues which disadvantage consumers, such as rent review clauses which allow ground rents to be increased disproportionately to the value of the property, and also “consent fees” where landlords have the right to claim uncapped amounts for granting routine consents, for example for alterations or underlettings. However, some parts of the media have blown this out of proportion suggesting that someone with a leasehold interest does not actually “own” their property. This is simply not true. Leasehold is a form of home ownership and provided that the length of the lease is sufficiently long, there should be no issue with the principle.

The Government certainly has its work cut out for it in legislating for such changes. There will need to be exceptions for shared ownership and schemes where the configuration of properties makes freehold unworkable. If not leasehold, then what is the alternative? The Government has stated its intention to “reinvigorate commonhold.” This will be interesting, given that many of the largest mortgage lenders will not currently lend against commonhold properties. This is the main reason that this form of tenure, introduced in 2002 and be very rarely used in practice.

There will also be a need for policy changes by landowners who have traditionally sold land only on a leasehold basis. For example, many local authorities will currently only sell sites on a leasehold basis, therefore new build plots have to be sold leasehold as well. Those landowners will have to adapt if they wish to continue to sell land to developers.

The position will become clearer in the coming months as the Government moves to legislate for these changes. So what should developers do in the meantime? The sensible approach is not to set up any new schemes which would include the sale of leasehold houses and/or the imposition of ground rents. This may mean that developers have to re-negotiate the terms of ongoing acquisitions to ensure that they themselves acquire a freehold rather than a leasehold interest.