The Government issued a consultation in October 2018 to seek views on how it can implement changes in the leasehold sector in England to tackle exploitative practices.
The Government’s response to the consultation has now been published: ‘Implementing reforms to the leasehold system in England’ as has its response to the ‘Housing, Communities and Local Government Select Committee report on Leasehold Reform’.
Changes are being proposed to tackle unfair leasehold practices. Purchasers are being burdened with leasehold properties which are hard to sell and are controlled by freeholders and managing agents who do not respond within reasonable time frames, in some cases charging what they want for permission fees. The Government wants to make the system fairer and more transparent for leasehold owners and make it easier for them to extend their leases or buy their freehold under existing legislation. The current process is not cheap, nor is it risk free for tenants and can often result in litigation.
The proposed changes will make fundamental changes to the residential leasehold sector. Investors and owners of commercial property should also be aware of the proposed changes especially if they own mixed-use properties.
These proposed changes will affect longer-term leases (not assured shorthold tenancies) in England only. Although the reforms will not immediately benefit existing leaseholders, the proposed changes to commonhold and leasehold enfranchisement may offer solutions and protection. Draft legislation will be produced once parliamentary time allows (it is not expected until 2020).
The headline reforms proposed are as follows:
Sale of New Leasehold Houses to be Banned
All new houses must be sold as freehold and not long leasehold. There will be limited exceptions for retirement properties.
Ground Rents in New Leases to be Set to a Peppercorn (Zero Financial Value)
Ground rents are often found in long leases and are annual payments a tenant must make to its landlord which gives the landlord an incentive to retain some interest in the property. Some leases contain mechanisms for ground rents to increase over decades which can make the payments quite substantial. This has become problematic for prospective purchasers who cannot get funding as banks are refusing to lend because of the increased liability of ground rents.
For new leases, the Government has proposed that ground rents will not have any monetary value.
Reform Commonhold
Commonhold is a form of land ownership which has been around for 15 years but there are few cases where land is held in this way. Under commonhold, each flat owner would own their flat and a share in a private company limited by guarantee which would be responsible for the maintenance and upkeep of the common parts.
Commonhold is an attractive model as it means no ground rents, no lease extensions, no risk of forfeiture, no landlord, and greater control for residents over service charges and major works.
There has been little uptake in commonhold as people are wary as to whether this system would work (there are presently few examples of commonhold). Lenders are wary that the private company could go insolvent and/or that inexperienced tenants will not contribute to or participate in the maintenance of the common parts of the building, making it risky for the bank to lend.
The Law Commission are to provide their responses and recommendations to the reform of commonhold, but the Government want existing leasehold flat ownership to be converted into commonhold.
Reform Enfranchisement
Enfranchisement is the process whereby a tenant can purchase the freehold or they can extend their lease. Enfranchisement is currently a costly and administratively burdensome process. The Government wish to make it cheaper, less cumbersome and more accessible.
The Law Commission are reviewing the process for enfranchisement and will report later this year, with their focus being on simplifying the law in this area and making it more favourable for residential tenants wishing to acquire the freehold interest.
Other Changes
The Government is also focusing on wider issues of reform:
- The Government has asked the Law Commission to update their work regarding forfeiture;
- Improving the leasehold sale process. Landlords and agents to produce replies to enquiries within a set time frame (15 working days) and the costs of doing so are to be capped;
- Greater clarity and information regarding the lease should be provided at the outset for people buying leasehold;
- Extend the right of first refusal to leasehold houses; and
- Promoting more fairness in the way that maintenance charges are charged to freeholders and leaseholders.
The Government has also launched a consultation seeking views on a New Homes Ombudsman to provide better redress for purchasers of new build homes. Please click here to access the consultation document. The consultation closes at 11:45pm on 22 August 2019. Responses are welcome from anyone who has an interest in the design and delivery of the New Homes Ombudsman, its powers, remit, and how to fund it.