The Leasehold Reform – Where are we?

Nov 6, 2018

Those involved in the property market in any way will be well aware of the state of confusion and uncertainty which currently surrounds the leasehold system. There has been much public speculation and many a promise made as to how the system will be reformed to better protect leaseholders in the UK – but what is actually happening?

The most apparent change to date has been the shift in attitude and policies of the majority of institutional lenders in respect of the terms on which they are now willing to lend against leasehold properties. The key changes are focused on ground rent provisions, with particular emphasis on rent review mechanisms. Some of the common requirements that major lenders have adopted are:

  • The maximum acceptable starting ground rent is 0.1% of the market value of the property.
  • The minimum lease term for a flat is 125 years.
  • The ground rent review is index linked to the retail prices index (RPI) and is reviewed no more frequently than every 5 years.
  • Mortgages will not be approved at all on leasehold houses (save for shared ownership properties).

So despite there being no current legislative measures in place, the major lenders’ hard-line stance towards leases is forcing developers to re-think the terms of their new leases to ensure they do not alienate a significant proportion of the potential buyer market.

On the topic of legislation, the Leasehold Reform Bill 2017-19 is due to have its second reading at the House of Commons on 23 November 2018. The Bill calls for three measures of reform to leasehold legislation:

  1. Introduce a statutory pricing model to calculate the cost of a freehold purchase, which would be capped at 10 times the annual ground rent payable by the leaseholder;
  2. Make provision about the award of legal costs in leasehold property tribunal cases, so that the legal costs of the freeholder would no longer be borne by the leaseholder; and
  3. Establish a compensation scheme for cases where leaseholders have received misleading particulars from sales agents or inadequate advice from solicitors which led to certain leasehold agreements.

In conjunction with the proposed new legislation, the Government issued a consultation paper on 15 October which sets out how the Government intends to make changes and how they should implement the reforms. The paper highlights four key areas of reform but the most notable of these is the proposal to reduce future ground rents to a nominal capped sum of £10 per annum throughout the lease term. The new cap will apply for all new leases (with the exception of shared ownership properties and community-led housing) and will include a surrender and re-grant of an existing lease. Therefore, if this is implemented, new residential leases will need to include a ground rent of no more than £10 per annum and will not be able to have rent review provisions.

The Law Commission has also recently published a series of proposed “radical reforms” in respect of the process by which leaseholders are able to purchase the freehold of their home (enfranchisement) with the aim of making the system easier and cheaper. The consultation is open until 20 November 2018 and they have invited people from across the spectrum to share their views on how this complicated area of law can be improved.

The scrutiny of ground rent provisions has also cast light on an unfortunate result of the drafting of the Housing Act 1988. A leasehold property with a ground rent of over £250 (for properties outside of London) is, technically speaking under the Act, an Assured Shorthold Tenancy. The main issue with this classification is that if a tenant is in arrears with their ground rent, then (depending on how long they have been arrears and for how much) the court must terminate their lease – they have no discretion in the matter. This is clearly not the intention of the Act where a tenant has paid a significant premium upfront for the property. However, it is unlikely this will be high on the political priority list given the other areas which are currently the focus of reform.

Therefore, it is clear that there is movement towards a reform of the leasehold system, most notably to date from lenders but in time, it appears there will be specific legislative measures imposed. This could cause significant inconvenience and delays for developers who have larger sites which are still ongoing when the new legislation is implemented, as it is likely the leases on which previous plots had completed would need to be amended to fall in line with the new measures.  For now however, it is a waiting game and developers and solicitors alike will have to do their best to pre-empt the next steps in order to ensure their leases do not fall foul of future requirements.

If you would like any further advice or assistance in respect of this matter or any other Real Estate issue, please do not hesitate to contact Lauren Purdey on 01276 854934 or email lauren.purdey@herrington-carmichael.com