Government’s Announcement of Reforms to Make it Easier and Cheaper for Leaseholders to Buy Their Homes

Leasehold house sales ban,  Zero ground rent & other matters

2018  – the then secretary of state for housing communities and local Government Sashid Javid announced a “crack down on unfair leasehold practices” that would include “new measures announced to cut out unfair and abusive practices within the leasehold system including a ban on leaseholds for almost all new build houses”.  The measures were to include:

• Preventing the sale of new houses on a leasehold basis save where necessary i.e. shared ownership.
• Setting ground rents on new long leases at zero.
• Working with the Law Commission to make the process of purchasing a freehold or extending a flat lease “much easier, faster and cheaper”.
• Providing leaseholders with clear support on the various routes to redress available.
• A wider internal review of the support and advice available for leaseholders.
• Ensuring freeholders have equivalent rights to challenge unfair service charges.

As consultation was launched around these issues and the time and cost of obtaining management information from a landlord on the sale of a leasehold unit which closed in November 2018.

In March 2019 a select committee made recommendations that ground rent in new leases be set at £0.

On 27 June 2019 James Brokenshire, the then secretary of state for housing communities and local Government, announced the Government would:

• Abolish the sale of new houses on a leasehold basis.
• Reduce ground rents on new leases to £0.
• Require that management information needed by a seller be provided by the landlord within 15 working days for no more than £200.
• Adjust Help to Buy to remove funding for houses sold on a leasehold basis and enable house buyers wrongly sold leasehold to be given the right to acquire the freehold at no extra cost.  The original plan to reduce ground rents to a cap of £10 per annum was dropped.  A date for the legislation was not set.

The Government then published its response to the consultation providing more detail around James Brokenshire’s announcement:

Ban on sale of houses via leasehold –

• The ban was come in to effect immediately upon the legislation coming into force as opposed to there being any transitional period and it would affect house leases granted since 22 December 2017 save those granted for up to 21 years.
• Exemptions from the ban would include shared ownership properties, community lead housing, certain National Trust sites and ground properties, retirement properties and home reversion plans were to be exempt.  Options agreements entered into before December 2017 were to be caught.
• Land Registry was to be set up as the gatekeeper with civil penalties being introduced for breaches.
• As regard the problem of enforcing positive covenants the Government said it would respond to the Law Commission’s report in that regard.
• Newly created freeholds were to be included within the existing estate management schemes (where beforehand just those acquired via the enfranchisement process were covered).

Zero ground rent in new leases –

• Again there is to be no transition period on the basis that sufficient warning of the proposals have been given.
• There were to be exemptions for community lead housing schemes, retirement property, mixed use leases and home reversion plans.  Retirement property is now to be brought within the ambit of the restriction.  Shared ownership properties are also within the ambit but it doesn’t restrict their ability to charge rent on the landlord’s retained equity share.
• Voluntary lease extensions can continue the existing ground rent arrangements during the original lease term but not beyond; the restriction applies from there.
• Ground rent above zero value where applicable will not be enforceable where it applies.  If paid in error the tenant is entitled to a refund plus reimbursement of costs incurred.  There is no limitation period in that regard.  Civil penalties of up to £5,000 per property may be imposed on freeholders charging ground rent in breach.

Service charge protection for freeholders – house freeholders to be given the right to challenge the reasonableness of estate rent charges in the same way flat owners can do so in respect of their service charges.  Able to apply to First-tier Tribunal to appoint a manager to manage the services provided by that estate rent charge.

Management information on sale – reasonable fee of up to £200 to provide industry standard LPE1 replies.  Up to £50 plus VAT to update replies.

It remains for legislation to be introduced in this regard.

Valuation and enfranchisement premia

The Law Commission issued its “report on options to reduce the price payable” on 9 January 2020 which is available at www.lawcomm.gov.uk/project/leasehold-enfranchisement/.

Their terms of reference were “to examine the options to reduce the premium (price) payable by existing and future leaseholders to enfranchise whilst ensuring compensation is paid to landlords to reflect their legitimate property interests”.

They put forward three alternative options for the valuation framework.  As the Government has recently announced marriage value will not be payable it seems likely that scheme 1 is to be implemented with one or more of the sub options;

Under scheme 2 in addition a proportion of “marriage value” is payable and so it is a halfway house – this portion is based on what a buyer of the freehold would pay for the prospect that a flat owner might have to pay by way of marriage value in future.  Of course if marriage value is being abolished then how can there be hope of that which leaves scheme 1.

In the example given in the Law Commission’s summary document (P17) the premium was reduced from circa £16.5k to circa £9k under scheme 1 and £10.6k under scheme 2.

The calculation of the value of the remaining parts of the premium namely the term and reversion rely on a capitalisation rate and deferment rate respectively.  So the former is used to calculate the sum that would currently represent the value of the ground rent income stream to be lost and the latter to reflect the fact that instead of receiving the benefit of vacant possession of the property in the future the landlord will receive money compensation now.

By changing those rates the level of premium can be reduced.  Only a small change is needed to make a big difference in the premium payable; In the example given in the summary (P18) a 1% movement in favour of the leaseholder in respect of each of these rates would produce a saving to the leaseholder of broadly speaking 20%.  Moving them in the other direction by the same amount has a broadly similar upward effect on the premium.

The amount of ground rent taken into account when compensating the landlord for the loss of that income stream may be capped to exclude the element above that set by the Government as “onerous” which may be set at 0.1% of the freehold value of the property.  This could have a strong effect on premia; the example given in the report with a ground rent of £300 per annum doubling every 10 years for example would experience a reduction in the premium payable from circa £79.5k to approximately £6.2k.

Development value which is most commonly payable by a group of leaseholders collectively acquiring their freehold i.e. to reflect the value of building further floors or flats on top of the existing block can be a significant element of the premium.  The Government has indicated they will enable leaseholders to avoid paying this where they are prepared to accept a restriction on future development instead.

Differential pricing for different types of leaseholder i.e. by reducing the premium payable by owner occupiers – the Government made no mention of this in its press release but that doesn’t close off entirely the possibility of the detail around their proposals including this.  They might attach this pre-condition to marriage value being disapplied and/or the application of preferential rates so as to head off the risk of a human rights challenge by landlords.

Other reforms

The Government’s response with regard to the Law Commission’s other reports around common-hold, enfranchisement and the right to manage are awaited.  Their latest press release makes clear their intentions around common-hold namely that it is to be reformed with a view to widespread take up.

Mark Vinall, Partner at Winckworth Sherwood