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12th January 2018

Government announces it will take action to introduce new rules on leasehold houses and escalating ground rents.

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2017 saw the general public’s interest in residential leasehold properties re-ignited by the publication in the media of a number of high profile and critical articles. These related to developers’ increasingly common practice of selling new houses as leasehold (rather than freehold) properties and including onerous and unfair ground rents in new leases.
The thrust of the criticism was highlighting the fact that substantial prices have been paid by buyers of long leases, only to discover that the terms of their leases are so onerous that they have difficulty selling or securing mortgage finance on their properties.

An explanation of the operation and reasons for the existence and use of leasehold interests and analysis of the issues that have arisen is more particularly discussed within Hewitsons residential newsletter issued in the autumn of 2017, see here.

As part of the Government’s policy and commitment to addressing the wider issues of housing in England, the Housing White Paper committed to ensuring the rights of ordinary consumers and individual homeowners are protected and unfair and onerous practices and terms are legislated on. A summary of responses to the Government Consultation (together with the Government commentary on those responses, titled tackling unfair practices in the leasehold market) were published on 21 December 2017. In that commentary the practices adopted by developers have been described by The Secretary of State for Communities and Local Government, Sajid Javid, as ‘feudal’ and he has committed to pursue the following proposals;

  • A ban on new build leasehold houses, subject to exceptions where they are ‘necessary’. One such exception would be where the developer/builder themselves only owns a long leasehold interest in the land being developed.
  • That all new leases granted for a term of more than 21 years are to have their ground rents set at zero.
  • The introduction of processes that will make it easier and cheaper for people to buy the freehold of their leasehold property.
  • The removal of support for Help to Buy Equity Loans for leasehold houses, save where there are specific circumstances which justify use of a leasehold interest.
Developers have so far provided no evidence to support their argument that returns from the sale of freeholds has enabled them to sell leasehold houses on those developments at lower prices. Nevertheless, there must be a possibility that the loss of this revenue stream impacts on prices in the future, or even on the viability of some schemes.

Where this proposal could certainly have a dramatic impact is on the activities of those businesses that operate in the sale and purchase of ground rent interests.

Action on these government observations remains on the 2018 political agenda and the next stage is for draft legislation to be brought before Parliament. At this point the specifics of how these changes are to be made will become clearer. The indications are that this is intended to occur during the 2018 Parliamentary session.

For more information please contact Carolynn Davies on 020 7831 8888 or click here to email Carolynn, or alternatively contact Tim Middleton on 01223 532711 or click here to email Tim.