10 things you need to know about the leasehold consultation
Sajid Javid, the secretary of state for communities and local government, wants to end ‘feudal practices’ in the housing market. But what’s in the consultation document?
1) Leasehold is on the rise
Land Registry figures show that leasehold made up 43% of all new-build registrations in England and Wales in 2015, compared to 22% in 1996. Many parts of England have seen an increase in the development of flats which are sold on a leasehold basis.
Increasingly, new build houses are being sold as leasehold in parts of the country where they had not been before. Some of these have no shared services or facilities, and there appears to be no obvious reason why the freehold is not sold at the point of sale.
The consultation highlights parts of Cheshire, Greater Manchester, Lancashire and Merseyside as problem areas, but says it is not limited to these parts of the country.
Leasehold is used in garden villages, retirement villages and in areas of National Trust/Crown land, for example. The consultation asks which exceptions are justified.
2) Customers do not understand the implications
Where leasehold and freehold purchase options are both available for a new build house, government said the comparative costs and benefits of each may not be explained to consumers. It is also not clear the leasehold discount is always passed on to the consumer.
Even if there is a discount, it doesn’t necessarily reflect the additional medium to long term costs leaseholders may face. These include: paying an increasing and continuing ground rent; paying potential fees for permissions to make alterations to a property or covenants in a lease; and the financial impact of extending the lease or buying the freehold from the developer after moving in.
3) Help to Buy access will be limited
Government plans to remove Help to Buy equity loan support on new builds sold as leasehold without good reason. If leasehold is justified, it would need to be at “reasonable” ground rent terms. This measure would be introduced as soon as possible.
4) Will prices rise?
Developers and landowners argue that restricting their ability to sell on freehold interests to third party investors will result in increased house prices, in order to compensate developers, and will reduce choice.
The government said it is not convinced of these arguments. It has asked for views on the likely impact of restricting leasehold and what measures should be taken to minimise impact on the existing development pipeline.
5) Plans to limit ground rents
Government says ground rents have been rising from their “peppercorn” levels and developers are increasingly selling leasehold properties with shorter review periods, often every ten years.
There are cases where freeholders are charged initial ground rents of £295 per year on properties purchased for just under £200,000, which increase to £9,440 per year after 50 years. In these cases the estimated cost of purchasing the freehold would be over £35,000, making it tricky to sell or remortgage.
Developers can make returns from selling on ground rents that are up to 35 times the annual ground rent value.
Currently residential leasehold law in England does not limit the level of ground rent payable in a lease. Government wants to limit ground rents in new leases, ensuring they start and remain at a near zero financial level.
Exceptions could apply to housing association and local authority tenants exercising the Right to Buy where most ground rents are set to £10 per year. It is asking what would be the impact of this and what a more “reasonable” ground rent regime would look like if a case was made for this.
6) Lenders can take a role
Government said it wants to explore the range of means by which fairer ground rents might be achieved, including voluntary initiatives. It references action taken by Nationwide in May to prevent lending on properties with ground rents that double every 15 years or less, and stating a maximum acceptable starting ground rent of 0.1% of the property value for new builds plus leases of 125 years or more for flats, and 250 years or more for houses.
7) What about existing leaseholders?
Government has asked for views on what steps could be taken to improve the situation of these leaseholders, which could include steps to tackle unreasonable and onerous rises in the future and strengthen the rights of consumer redress from unfair trading practices.
8) Exempting leaseholders from Ground 8 possession orders
An unintended consequence of increasing levels of ground rents is that those over £1,000 per year in Greater London and £250 per year elsewhere in England are classed as an assured tenancy under the Housing Act 1988. This means that the landlord can seek to end the occupancy by an order of the court, and attempt to evict the tenant.
Government wants to exempt leaseholders from legislation that was designed to stop assured tenants in the private rented sector building up rent arrears. This would not affect a landlord’s ability to take legal action where a leaseholder has breached the terms of their lease.
9) Shared spaces and service charges
In cases where freeholders pay for the maintenance of communal areas and facilities on a private estate, they do not have the same rights to challenge the reasonableness of service charges that qualifying leaseholders do. The government wants to change that.
10) What’s next?
This is only step one of the government’s plans to tackle transparency and fairness in the market following February’s Housing White Paper. Next, it intends to focus on improving commonhold, how managing agents operate, and leasehold terms and enfranchisement.