Ground rents to be outlawed for new residential lettings

The government has issued its response to last autumn’s consultation on its proposed ban on the sale of leasehold houses and on outlawing ground rents in new residential lettings.

No draft legislation has yet been published, but the government has provided us with its most detailed explanation yet of its proposals to ban the sale of leasehold houses and ground rents in new residential leases. These proposals apply to properties in England only.

This initiative was first announced over 18 months ago, in December 2017 (see our article Major changes proposed to how new houses and flats are sold in England). This was followed up by a consultation in October 2018 (see our article The government pushes forward with residential leasehold reforms). What we now have is effectively ‘heads of terms’ for the draft Bill that will be published ‘as soon as Parliamentary time allows’.

This is a summary of the proposals as they now stand.

Leasehold houses

The key proposal remains that, except in very limited circumstances, once the new legislation takes effect it will not be possible to register a new lease of a house at the Land Registry for a term that exceeds 21 years. It is unclear whether this will apply to all leases or just leases where a premium is being paid.

The government accepts that a suitable definition of a house will be required for the new legislation. Its current thinking is that a house will be defined as a single unit of living accommodation which is either self-contained or a self-contained part of a building. It must be capable of being redeveloped separately, meaning (in an example given in the government’s response) that a building on top of a communal underground car park will not be a house for this purpose.

However, two new exemptions have been announced. The first is retirement properties, as they are part of ‘a wider communal setting’. The second exemption is for lease-based financial products, including home reversion plans and home purchase plans that help people release capital from their homes or help them to buy a home. Agricultural tenancies will also be outside the scope of the new legislation, as will shared ownership properties.

In one respect, the legislation will have retrospective effect, as set out in the consultation document. Once it comes into force, 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). It does not matter how the lease was acquired – whether by the grant of a new lease or the assignment of an existing lease. As previously announced, 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. This latter provision is to prevent land being acquired now for the purpose of circumventing the proposed ban.

Developers will need to take care not to transfer leasehold land originally acquired on or before 21 December 2017 to a group company in the future, as in that case the benefit of the exemption will be lost.

Rights of first refusal for existing leasehold house owners

Existing leasehold house owners, and new leasehold house owners (on the limited occasions when new leases of house are permitted under the new law), will be given a right of first refusal when the freeholder wishes to sell.

This will be along the same lines as flat owners enjoy under the Landlord and Tenant Act 1987. Those provisions may be amended to give tenants of flats greater protection as well.

Reduction of future ground rents to a peppercorn

Ground rents in new leases of flats (and, where permitted, leases of houses) granted after the legislation takes effect will be set at a peppercorn, which effectively means that ground rents will be outlawed completely. The consultation paper suggested a cap of £10 per annum but the government has reverted to its original proposal of a peppercorn. Any ground rent that is reserved in a lease granted after the ban takes effect will not be recoverable by the landlord; if tenants pay it in error, they will be able to recover it. Additionally landlords who charge rent when they should not do so will be liable to a civil penalty of up to £5,000.

The government has confirmed that the ban will not apply to leases of properties in retirement villages (subject to certain conditions being satisfied) and community-led housing projects. The proposals will not apply to commercial parts of mixed-use premises or to the rental element of shared ownership properties.

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 document suggested a three-month grace period after the legislation come into force. However, the proposal is now that the ban will take effect as soon as the legislation comes into force.  There will be no grace period and no grandfathering provisions are proposed for contracts exchanged before the legislation takes effect but where the lease is granted after the legislation takes effect. In such a case, presumably the landlord will still have to grant the lease but will not be able to recover the rent. If the rent is mistakenly paid, it will be recoverable.

Ground rents in leases granted before the new legislation comes into force will remain payable by the tenants under those leases.

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 has confirmed that it intends to 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’s response talks about payments made under estate rentcharges, but in practice most freehold service charges are drafted as simple contractual obligations rather than estate rentcharges. We need to see the draft legislation before it is clear exactly what the government is proposing.

The government originally consulted on whether freeholders should have equivalent rights to leaseholders to seek the appointment of a manager to run services. A decision on this has been delayed until after the Law Commission has reported as part of its right-to-manage project.

Maximum fees for providing leasehold information on a sale

The government proposes to set a turnaround time of no more than 15 working days for landlords or their managing agents to provide information on a prospective sale, and will set a maximum fee of £200 plus VAT for supplying the information.

Commentary

We now have to await the publication of the draft bill before we have a complete picture of what is proposed. This will be done ‘as soon as Parliamentary time allows’, and there are plenty of other distractions for Parliament at the moment.

Interestingly the consultation response does not mention the MHCLG select committee’s strongly worded report that was issued earlier this year (see our article Residential lease reform gathers pace). This contained some contentious suggestions, including that a cap should be introduced on ground rents in existing leases. This raises difficult human rights issues and it seems the government has made the practical decision not to wade into such difficult waters.

Further Information

Implementing reforms to the leasehold system in England: summary of consultation responses and Government response