Government’s leasehold practice consultation ‘lacks detail’

There have been many attention-grabbing headlines about leasehold homebuyers having to bear crippling ground rent increases and, as a result, being left with unaffordable, unmortgageable and unsaleable properties. The government released its consultation paper – Tackling unfair practices in the leasehold market – to combat this at the end of July. The paper makes interesting reading, but lenders and investors should be just as interested as developers and leaseholders in the potential consequences of some of the proposals. What’s in the detail? Some of the plans are sensible. For example, an unintended consequence of higher ground rent levels is that where ground rents exceed £1,000 in greater London and £250 elsewhere, the lease could be an assured tenancy within the terms of the Housing Act 1988. Accordingly, if the leaseholder accrues ground rent arrears, the freeholder can rely on ground 8 of the Act and seek possession of the property on the basis that the rent is more than three months in arrears. This is a mandatory ground, and so denies lenders the opportunity to pay the arrears so as to protect their interest as they usually would if forfeiture were pursued instead. The proposal to exempt long leaseholds from this seems sensible, and freeholders will still have other enforcement options available. The most controversial area of the consultation is, of course, the targeting of the high ground rent levels and the steep increases that some leasehold buyers are facing. The consultation paper explains that serious questions are being asked about why houses would ever be sold on a leasehold basis. However, leasehold can be useful if there are service charges relating to communal land or where it is beneficial to have leasehold covenants to protect the amenity of the area, such as prohibiting adverse alterations. The main proposal in the consultation paper is that developers would be prohibited from charging any ground rent in new leases. At first glance this seems a significant victory for all those campaigning for change. But it is heavy handed, and will it achieve the government’s aim? The current proposal would not affect existing leases and so those leaseholders hitting the headlines will not be any better off. Effect on the wider market It is also worth questioning how any proposed changes will affect the wider property market. Will it make developers less willing to build the new homes the government has been promising? Will those new homes have to be sold at higher prices to compensate for the lack of ground rent income? What about proposed developments which are already subject to pre-sale agreements with investors? Many lenders are already changing their requirements for ground rents, which will in itself force a change in market practice for future leaseholds. Indeed, even before this consultation, many developers had already moved away from these onerous ground rent review clauses. However, neither of these developments will help those homebuyers already affected by the leasehold practices that the consultation paper seeks to address. Developers and existing freeholders of properties with burdensome ground rent increases are being asked in the consultation to help their existing leaseholders, but without detailed guidance on how they should do so. Taylor Wimpey has been praised for setting aside £130m for a ground rent review scheme, and Countryside Properties has recently announced that it will be buying back freeholds and removing the ground rent obligations. Although many developers are obviously keen to foster good relationships with their leaseholders, even those who have publicly announced these types of proposals are already being criticised by some for not doing enough. But in the absence of clear government guidance, or new legislation or a detailed court or tribunal decision, is it any wonder that some freeholders are not taking action as yet? They are, of course, contractually entitled to these ground rent payments, and so have no reason to stop collecting the money they are owed, or to vary these provisions, until they are made to do so. Do the proposals go far enough? The proposals also do nothing to tackle the aspect of these stories that has caused the most outrage – the “surprise” when the ground rents are increased, or when premiums are demanded for consent to alterations, or when the premiums for collective enfranchisements or lease extensions are dramatically increased as a result of the ground rents payable. The consultation paper highlights that leaseholders are often unaware of these lease terms and their potential consequences and this seems to be a problem worthy of closer examination, to explore why people are buying leasehold properties without a proper understanding of the obligations (financial and otherwise) to which they are committing. Perhaps it is time to consider a standard form of report on title for residential leasehold buyers, or minimum standards as to issues which conveyancers are required to highlight and explain. This would help to ensure consistently high standards of reporting and would avoid important information affecting the value of a property being buried among a wealth of other detail. For those homebuyers now struggling to sell their property and who will not be helped by government proposals or industry initiatives, there is the prospect of a professional negligence claim against their conveyancers. Insurers will be watching closely but success with such claims will depend on the facts of each case and represent an unenviable position for those homebuyers. Click here for more detail on the leasehold consultation. Rachel Carfrae is an associate at Charles Russell Speechlys LLP