Derailing the Gravy Train – Consultation on Leasehold Reform

Sajid Javid, the Secretary of State for Communities and Local Government, has threatened to ‘derail the gravy train’ of property developers placing high charges in long-term leases such as high ground rents, so that the costs associated with owning your own home are more transparent.

Writing in The Times, Javid announced the start of a Government consultation on changes to long-term leasehold properties. The consultation asks questions on areas including:

1. Prohibiting the sale of leasehold houses (except in circumstances where developers are obliged to sell a house on a leasehold basis, for instance where a new house is built on National Trust land);
2. Changing the Help to Buy Scheme in relation to leasehold houses;
3. Limiting the starting value and increase of ground rents on all residential leases over 21 years;
4. Updating the Housing Act 1988 so that tenants with leases for over 21 years cannot be evicted for being in arrears of ground rent where the annual ground rent is over £1,000 in London and £250 elsewhere in England;
5. Enabling freeholders on private estates who have equivalent rights to leaseholders to challenge their service charge through the First Tier Tribunal (as leaseholders can); and
6. Areas for future reform of leasehold properties.

Whilst this consultation is wide-ranging, the headline-grabbing elements are reforms to ground rents and other charges in long-term leasehold properties.

Long-term leases usually incur various charges such as ground rent and service charge. Ground rent is an annual charge paid from the tenant (a homeowner) to their landlord for having a tenancy and differs from a service charge which is a charge that covers key expenses that landlords incur with respect to the property. Such costs include maintaining the structure of a building, maintaining a building’s common parts and insuring the building. Historically, ground rent for long-term leases would be for a token sum (often known as a ‘peppercorn’). In the current housing market, however, ground rent has a monetary value (for instance £250 per annum) which can be subject to a rent review. The ground rent then acts as a stream of income for the landlord and they can sell the freehold or securitise the income generated by the ground rent from a leasehold property.

Rent review provisions can create onerous liabilities on homeowners. For instance, a ground rent of £250 in 2010 which doubles every ten years would result in a ground rent of £8,000 by 2060 and £256,000 by 2110. In addition, long-term leases can contain other provisions that can be onerous to homeowners. For instance, if a tenant wants to make alterations to their home they may incur the landlord’s legal fees (which vary but can be over £1,000) to obtain their landlord’s permission. Such provisions in leases add difficulty to homeowners who wish to sell their home. Long term leasehold properties are often the only way that someone can own their own home which means that prospective homeowners have little choice but to incur these costs when they buy their home.

Some players in the housing market have already taken steps to counter these practices. For instance, the Nationwide Building Society has refused to lend money for mortgages on new built properties where the ground rent is more than 0.1% of the value of the property or where the length of the lease is less than 125 years for flats or 250 years for houses. However, such practices are not widespread in the housing market. The Government, therefore, wants a fairer deal for homeowners.

If you want to reply to the Government’s consultation, you can do so here until 19 September 2017.

For further information regarding this topic or any other property matters please contact Ian Gilmour – Partner, or any member of the Edwin Coe Property teams.

If you aren’t receiving our legal updates directly to your mailbox, please sign up now