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The future of the residential leasehold sector
Leasehold property and the issue of Ground Rents are currently hot topics. The Government issued a Consultation in the summer of 2017, which produced over 6,000 replies and, following consideration of these, the Government has produced proposals to crackdown on unfair and abusive practices in the leasehold system. So what measures are being proposed?
Ground rents will be set to zero
Changes will apparently be made so that ground rents (i.e. the annual sum payable by the leaseholder to the freeholder ) on newly granted leases of houses and flats will be a peppercorn (i.e. zero).
Developers, notably Taylor Wimpey and Persimmon, have recently been selling houses on a leasehold basis, adding further costs to buyers. With 1.4 million leasehold houses across England the number of leasehold houses is growing rapidly and so creating a problem that needs to be tackled.
However, whilst the suggestion of abolishing ground rent initially seems very attractive, it is likely to only apply to new properties. This has the potential of leaving existing leaseholders in a worse position by creating a two-tier system of leasehold property; new build flats and houses would be more attractive thereby making it harder for existing leasehold flat or house owners to sell their homes.
There does not appear to be any proposals to tackle onerous ground rents in existing leases. However, since 1993 leaseholders of flats have had the statutory right to extend their leases and reduce their ground rent to zero in the process under the provisions of the Leasehold Reform Housing and Urban Development Act 1993. Many leaseholders have taken advantage of these provisions but some still endeavour to agree an extension outside of the provisions of the 1993 Act, thereby leaving themselves wide open to accepting onerous ground rents as such offers of a lease extension by the freeholder often contain high reserved ground rent provisions and are often made on a ‘take it or leave it’ basis. The moral quandary is whether the Government should be expected to wade in and rescue those who have freely entered into a bad bargain? It may be that the remedy for those leaseholders lies against the professional whose advice they sought prior to signing, or buying, such a lease rather than a rescue-package from the Government.
Lease Extensions and Enfranchisement
The Government has indicated that it is keen to make it easier for leaseholders to buy their freehold or extend their lease. What this means has yet to be seen, but a possibility is a cap on the costs that a Landlord can recover in the process or tightening up timeframes in the process. The difficulty here is that Landlords may be out of pocket when responding to lease extension or enfranchisement claims.
The current costs recovery provisions are contained in sections 33 and 60 of the 1993 Act, for enfranchisement and lease extensions respectively. In the absence of agreement between the parties as to the level of costs payable by the leaseholder, an application can be made to the First-Tier Tribunal, who have jurisdiction to decide how much is payable and by whom.
The Landlord cannot recover under statute any costs associated with a Tribunal application and so (assuming the Tribunal do not make a costs order against the Leaseholders) such costs are to be met by the Landlord itself. This costs exclusion currently works to concentrate a Landlord’s mind to sensible and timely negotiations under the 1993 Act provisions, to avoid having to foot the bill to respond to a Tribunal application made by the Leaseholder. However, the weakness in the current system affects Leaseholders who have large commercial Landlords who have both the money and stomach for a fight and will happily drag proceedings out knowing that the Leaseholders only option is to incur costs by applying to the Tribunal in the hope that they will either run out of money during the process, just cave into the landlord’s demands to avoid the risk or be unable to afford the premium when the time comes to complete.
Narrowing the provisions further, to cap costs, is likely to result in the Landlord footing a significant part of the bill for being forced to sell an asset that he did not wish to sell in the first place. It should be remembered that not all Landlords are unscrupulous and commercially-minded. Some Landlords own one or two freeholds, or a small portfolio, and are using this as an investment to provide for their retirement. To change the goalposts completely would undoubtedly affect these owners and so the polar opposite.
What effect does this have on the leasehold market?
We are seeing more and more Enquiries coming through in leasehold sale transactions asking for ground rents to be removed from existing leases, and so the issue is clearly in the minds of buyers and their conveyancers alike. Landlords with onerous ground rent or other provisions in their leases may do well to agree to amendments of their own volition rather than having changes forced upon them by the Government.
At present, there have been no draft legislative proposals put before Parliament but from the buzz surrounding leasehold property it is clear that the face of the leasehold market is likely to change significantly in the coming months and years.