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28 June 2019

Government issues response to leasehold reform consultation

The Government has just published its long awaited response to consultation on reforms to the residential leasehold system in England. Whilst it is no surprise that reform is on its way there has, until now, been some uncertainty as to the direction this will take. Calls from angry leaseholders to stamp out unscrupulous landlord practices, ban ground rents and even abolish the leasehold system altogether have been countered by arguments from others as to the perceived benefits of retaining aspects of the current system. House builders have been left trying to decipher current best practice in order to continue selling their homes. Whilst legislation is unlikely to be in place until at least 2020, it is now clear that reforms will include:

  • A ban on the selling of leasehold houses: This was expected and has already been largely implemented following the press scandal that first highlighted the necessity for leasehold reform. What will be of interest is the proposal to define ‘houses’ so as to ensure that leaseholds can still be created where necessary. For example, where a house shares a common building structure with other dwellings.
  • Ground rents in new leases to be set to zero: The Government has listened to the debate on both sides but has decided there is little merit in retaining ground rents, even at a reduced level. It believes that good quality leasehold management can still be achieved through a responsible service charge system. There are to be some limited exceptions for retirement homes, community-led developments and financial products such as equity release. There is to be no exemption for reserving ground rents in shared ownership leases.
  • Reform of the commonhold and leasehold enfranchisement: Commonhold is due to be ‘reinvigorated’ to remove perceived shortcomings in the current legislation, in the hope it will offer an attractive alternative to leaseholds development structures. Tenant’s rights to extend their leases or buy their freehold are set to become easier, faster and cheaper. It will be interesting to see how this ‘cheaper’ process is to be balanced against the existing financial interests of property investors.
  • Statutory protection for freehold owners: With more and more housing developments retaining private shared facilities, the Government recognises that it is not only leaseholders that may benefit from statutory protection in relation to the operation of service charges. They therefore propose to introduce new legislation to plug this gap, with protections similar to those contained in the Landlord and Tenant Act 1985 and introduction of a freeholder ‘right to manage’.
  • Improving the leasehold sale process: The Government is concerned about reports of unreasonably high charges and lengthy delays in obtaining leasehold management information when selling residential properties. They therefore intend to introduce a statutory maximum turnaround period of 15 working days for producing standardised LPE1 information packs, with a charge cap of £200 plus VAT.

The detail of reform is welcome and gives developers, as well as others in the residential property sector, time to organise their practices ahead of legislation being introduced. There is a clear message of expectation in the Government’s response – when legislation is implemented, it will be of immediate effect. The reforms do not instantly resolve the issue of the many thousands of existing leasehold properties, which contain material ground rents as well as other clauses now considered onerous. Nevertheless, there is likely to be a gradual reform and interesting times lie ahead, as individuals look to determine who should pay the cost of varying these provisions. It is hard to see how ground rents could be wiped out overnight without devastating effect on a wide range of property investors, amongst them pension funds. However, the proposed reforms to leasehold enfranchisement will support gradual change. In addition, the Government has made it clear that it will continue its work on wider issues of reform such as restricting use of unfair leasehold terms, raising standards across the property agent sector, improving support and advice to leaseholders and applying pressure on developers to offer assistance to their existing leaseholders.

For more information, read the Ministry of Housing, Communities and Local Government’s summary. Topics covered include implementing the ban on the unjustified use of new leases for houses and implementing the reduction of future ground rents to a nominal value.

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