The government pushes forward with residential leasehold reforms

The government is consulting on its plans to outlaw new leasehold houses and to ban ground rents. The consultation period lasts just six weeks.

The government has issued its long-awaited consultation setting out more details about its proposals to ban the sale of houses by granting the buyer a long lease and to ban ground rents in all new residential leases. The proposals will not affect existing leases of houses or flats.

The government announced these proposals at the end of 2017 (see our article ‘Major changes proposed to how new houses and flats are sold in England’ on 2 January 2018) and this consultation follows a silence of almost ten months. The consultation invites comment on the proposals it makes, how they will operate and where exemptions might be needed.

Timing

The proposals will be enacted ‘as soon as Parliamentary time allows’. This is one of the government’s key policies and so we can expect it to be pushed through as soon as Parliament’s time ceases to be taken up with consideration of the Brexit negotiations

With one key exception in relation to long leases for houses (identified below), it appears that the changes will not be retrospective. This means that they ought not to apply to leases that are already in place on the date when the new legislation takes effect.

Notably, there is no carve-out for leases granted after the effective date but pursuant to contracts exchanged before that date (a so-called ‘grandfathering’ provision). So this means that when the proposals are introduced, they will apparently apply in such a way that they override the terms of existing contracts. There are plenty of such contracts already in place in relation to new-build properties, and doubtless more agreements being exchanged daily.

It would be conventional to include such a grandfathering provision in new legislation, but the government may decide not to include it in this case because its policy intentions have been made clear already. This will be one of the issues that we will be raising in our consultation response.

Leasehold houses

The key proposal is that, except in very limited circumstances, once the new legislation takes effect it will not be possible for anyone to register a new lease of a house at the Land Registry. This will effectively prevent finance being available for such a lease, meaning that housebuilders will no longer offer them. We understand that many housebuilders have already adopted this position and no longer offer houses for sale by way of the grant of a lease, except where there is a good reason to do so.

The government accepts that a suitable definition of a house will be required for the new legislation and asks for suggestions. This question has also been asked by the Law Commission in connection with its current consultation on enfranchisement. The definition currently used is far from ideal and has been the source of several appeals to the Supreme Court – and there is still no clear consensus of what a house is. It is to be hoped that the definitions coming out from these two consultations will be consistent.

One of the reasons that houses are currently sold on a leasehold basis is to enable estate service charge arrangements to operate. The government’s view is that, in the future, developers should use an alternative method of setting up service charge schemes – deeds of positive covenants or rent charges. However, a draft bill will be published in 2019 for consultation on the Law Commission’s proposals to reform the law relating to covenants and easements to make it simpler for positive obligations to run with land. This should simplify the process of creating estate service charges for residential estates.

Once the legislation comes into effect, it will ban the grant of long leases for houses on any freehold land, and also on any leasehold land acquired after 21 December 2017 (the date of the government’s original announcement). Again it is unclear whether there will be grandfathering provisions to allow housebuilders to sell houses by way of a long lease where the housebuilder has a lease that was granted after 21 December 2017 pursuant to an agreement for lease exchanged before that date, or where the housebuilder buys leasehold land after 21 December 2017 where the lease was granted before this date. Again, we will make these points in our response to the consultation.

There may be other exceptions to the ban on new leases of houses in the forthcoming legislation and the consultation paper asks where they may be needed. It will be important to identify where leases of houses may still be required and draw these to the attention of the government.

Areas that we have already identified include exemptions for certain equity release products, Sharia compliant financing and timeshare leases. The government is also considering how these proposals will apply to land held by the Crown or by the National Trust. Shared ownership leases will not be affected by these proposals.

Ground rents

Ground rents in new leases of flats (and, where permitted, houses) granted after the legislation takes effect will not be banned completely (as originally proposed) but will be capped at a maximum of £10 per annum. Special treatment may be given to leases of properties in retirement villages and community-led housing projects where higher ground rents may be permitted. The proposals will not apply to commercial parts of mixed use premises.

The ground rent cap will apply to surrenders and renewals of leases (including surrenders and re-grants by operation of law), as well as lease extensions outside the enfranchisement framework.

The consultation paper states that the cap on ground rents in new leases will come into force three months after commencement of the new legislation.
Service charges payable by freeholder owners of houses

Currently tenants of flats and houses have various protections contained in the Landlord and Tenant Act 1985. These require maintenance charges to be reasonably incurred and services that are provided to be of a reasonable standard.

Consultation requirements and obligations on the provider of services to provide information to the tenant also apply. The government says that it will provide similar protection to freehold owners of houses who pay a service charge.

Like tenants, they will be able to challenge the reasonableness of the charges they are required to pay towards the maintenance of communal areas and facilities in the First-tier Tribunal.

The government is also consulting on whether freeholders should have equivalent rights to leaseholders to seek the appointment of a manager to run services.

Assignment of leases

The government wants to lay down maximium response times and fees for landlords providing information required by leaseholders (of both flats and houses) to enable them to sell their properties more easily. It asks for suggestions for suitable response times and maximum fees.

You can read the consultation paper by clicking on this link. The consultation period is only six weeks, and responses to it must be submitted no later than 26 November 2018.