Tackling Unfair Practices in the Leasehold Market

Hart Brown responds to Governments consultation paper – “Tackling unfair practices in the leasehold market.”

The Department for Communities and Local Government has released its consultation paper “Tackling unfair practices in the leasehold market”, which it promised in its Housing White Paper “Fixing our broken housing market” in February this year.

Some interesting proposals and questions have been raised with the Government’s aim to address current unfairness for leaseholders of houses.

Consultation is sought in respect of the following issues:

Limiting the Sale of new build leasehold houses

Other than in exceptional circumstances it being considered whether the sale of houses with leasehold title should cease or at least be limited. The Government appears to be concerned that the “discount” which should be given by developers on the purchase price for leasehold houses (essentially to take account of the ongoing ground rent) is not actually being passed on to buyers.  Views are requested as to what steps the Government could take to limit the sale of houses with a leasehold title.  There does appear to be a recognition of building developers position that such restrictions would result in an increase in house prices coupled with a detrimental effect on the supply of new build houses.

Reducing Help to Buy Equity Loan scheme for leasehold houses

The Government proposes to remove, as far as possible, this assistance by introducing a non-legislative policy.  The hope is presumably to prevent many buyers from being able to purchase new builds with a leasehold tenure, which limits the potential market that building develops can aim to sell to.

Limiting ground rents in new leases

There is a proposal to restrict the reservation of ground rents (or onerous ground rents) in new leases (save in the exceptional cases where the landlord is a Local Authority or Housing Association).  The level of ground rent is directly relevant to the cost of a lease extension or purchase of the freehold title and by limiting the ground rent payable, the premium payable for an extended lease or the freehold is then, in theory, also limited.

There is also the issue of how to assist those leaseholders who already have onerous ground rents in their leases and the Government invites views on how they might be able to address this.

Exempting leaseholders from Ground 8 possession claims

The Government proposes to change the existing legislation so that long leaseholders cannot be faced with possession proceedings under Ground 8 of the Housing Act 1988 for failure to pay ground rent. This appears to be an unintended consequence of the 1988 Act. As ground rents continue to rise in some leases it is becoming more likely that Ground 8 can be used by landlords to repossess properties.

Service charges on freehold or mixed tenure estate becoming subject to “reasonableness” challenges

At present there is limited scope for freeholders or leaseholders of houses to challenge the charges they pay for the repair and maintenance of common parts of their estates.  The Government proposes to give payers of estate charges the same or similar rights to challenge the reasonable of these charges they pay, perhaps via the First-tier Tribunal Property Chamber (the FTT).  The FTT currently deals with these challenges for leaseholders of blocks of flats who pay towards the repair and maintenance of their blocks.

Future issues for reform

The Government also invites other suggestions for future reform. There is a mention of the Government looking again at promoting commonhold (a type of legal tenure which has not been readily embraced by the property sector), the way in which managing agents operate and at leasehold terms and enfranchisement.

Given the experience at Hart Brown of dealing with these issues on a day to day basis with clients, the Government may wish to consider as part of its consultation the following points:
  1. Building Developers insist on or encourage the use of a “pet solicitor” to handle the purchase for the buyer. This solicitor is usually fairly inexpensive (sometimes even paid for by the developer) but is unlikely to be truly independent due to their relationship with the developer. Many of our clients have complained that they were not properly made aware that they were buying a leasehold house or of the potential costs of acquiring the freehold at a later date. An independent solicitor has no relationship with the developer and is not dependant on the developer’s referrals for business.
  2. Some developers are including a provision in leases which require leaseholders to pay the landlord 1% of the value of the property (or of the sale price) to the landlord on any sale. These provisions are typically seen in retirement flat leases.  This is an example of developers or landlord seeking future income from the sale of properties.  This kind of provision might replace ground rents if the same are to be restricted and so Government needs to consider (and perhaps restrict) other ways that developers are reserving a future income in leases.
  3. Consideration should be given to providing a statutory right for freeholders or leaseholders on an estate where an estate service charge is payable to take over the management of the estate, similar to the statutory Right to Manage, which is currently only available to leaseholders of flats.  Currently, freeholders and leaseholders of estates can only acquire the management obligations if their leases (or transfers in the case of freehold houses) contain a contractual provision to this effect. Giving freeholders/leaseholders of houses the right to challenge service charges is all very well, but litigation is costly and worrying, and the FTT has a very limited costs jurisdiction, therefore freeholders/leaseholders cannot generally recover any legal costs they incur even if they are successful.
  4. A right of first refusal could be introduced to ensure developers or landlords offer the freehold for sale to their leaseholder before selling to a third party.  The Government points out the problem with this in the consultation paper (developers can get around this by entering into a contract with the third party before they grant the lease to the buyer of the house), but at least it will give an option to those whose only option at present is to exercise their right to enfranchise but only after they have owned their house for 2 years.
  5. The regulation of managing agents may address some of the concern regarding abuse of service charges.  Currently managing agents, who are often acting on the instruction of the landlord, but spending the leaseholders money, are unregulated.

Kindly shared by Emily Fitzpatrick and David Knapp, Hart Brown Solicitors