UK: Consultation On Leasehold Reform: A Wide-Ranging Project

Last Updated: 10 August 2017
Article by Emma Broad and Laura Gowing

On 25 July 2017 the Department for Communities and Local Government issued a consultation paper "Tackling unfair practices in the leasehold market" seeking views on "prohibiting the sale of new build leasehold houses, limiting ground rents and protecting leaseholders from possession orders". The consultation follows on from the Housing White Paper issued in February 2017 which highlighted the government's aim to "improve customer choice and fairness in the leasehold sector" and its "commitment to consult on a range of measures to tackle unfair and unreasonable abuses of leasehold".

The consultation paper outlines four key areas for reform:

Limiting the sale of new build leasehold houses

One of the key proposals being considered is a limit on the sale of new build leasehold (as opposed to freehold) houses. The government is concerned that "new build houses are being sold on a leasehold basis to create an income stream from the ground rent, or to generate additional income from the sale of the freehold interest after contracts have been exchanged. The government thinks that this represents poor value for customers."

The government is also considering removing Help to Buy Equity Loan support on new build houses where they are sold as leaseholds in circumstances which do not justify the decision to use leasehold rather than freehold. Where they are justified, support would only be available where the ground rents are reasonable.

While it appears that the government acknowledges that there may be exceptional circumstances which justify the sale of new build leasehold houses, what will constitute an exceptional circumstance will be a key issue for those responding to the consultation.

Limiting the reservation and increase of ground rents on all new residential leases over 21 years

The government is also targeting ground rents. It is concerned by the rising levels of ground rent noting that in some cases these can be initially priced at 0.5 per cent or more of the property price, or increase exponentially over a lease term. It is also concerned by the increasing frequency of ground rent reviews and the impact that rising ground rents can have on the cost of enfranchisement.

To tackle this the government is proposing placing limits on the amount of ground rent that can be reserved in new leases, possibly to as little as a peppercorn, and exploring ideas to tackle unreasonable and onerous ground rent reviews or stepped increases in both existing and new leases.

Exempting leaseholders potentially subject to "Ground 8" possession orders

One unintended consequence arising from the increase in levels of ground rents is that, where ground rents exceed £1,000 per year in Greater London and £250 per year elsewhere in England, a lease will be classified as an assured tenancy under the Housing Act 1988 (as amended by the Housing Act 1996). Once a lease has been classified as an assured tenancy, the landlord is entitled to apply to court pursuant to Ground 8 of that Act for a possession order if at least three months' rent is more than three months in arrears. As Ground 8 is a mandatory ground the court has no discretion but to grant the order for possession. This could catch out a long leaseholder who misses the annual payment of ground rent even though that was not the original intention of the Act.

The government is therefore considering amending the Housing Act 1988 further to remove any opportunity for a landlord to seek a Ground 8 possession order against a leaseholder with an annual ground rent of over £1,000 in Greater London, or over £250 elsewhere in England, that has more than three months arrears of ground rent.

Reviewing service charges on freehold and mixed tenure estates

Although the consultation is primarily concerned with the disadvantages of leasehold tenure, it extends to consider freehold property purchasers who are subjected to estate service charge payments for the maintenance of communal areas and facilities.

The paper notes that freeholders will usually have some rights under the documented service charge regime or at common law, but that "these may not be equivalent to the rights enjoyed by leaseholders under the terms of their leases and statute". Although freeholders may be paying for the same services as leaseholders (and will be free of separate ground rent obligations), they do not currently have the same ability to challenge the reasonableness of charges. Accordingly the government is inviting respondents to comment on whether or not they should be promoting solutions to provide freeholders with equivalent rights to leaseholders to challenge the reasonableness of service charges.

Going forward

This consultation closes on 19 September 2017. However, the government's drive for reform is unlikely to stop there. Section 7 of the paper reiterates the government's commitment, first stated in the Housing White Paper, to "take action to promote transparency and fairness for the growing number of leaseholders" and its intention to look at further steps to achieve this in what its promises will be "a wide-ranging project".

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