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Labour MP’s leasehold reform plans risk penalising freeholders, expert warns

Leasehold reform plans put forward by a Labour MP risk penalising pension funds and other investors who, in good faith, have invested in ground rent income streams, an expert has warned.15 Nov 2017

Property disputes expert Nicola Charlton of Pinsent Masons, the law firm behind Out-Law.com, added that the timing of the plans was also surprising, “given that it is widely anticipated that the government will be taking action on this issue following its recent consultation on tackling unfair leasehold practices and its pledge to tackle unfair and unreasonable abuses of leasehold”.

MP Justin Madders, who is deputy chair of the all-party parliamentary group (APPG) on leasehold reform, has introduced a private member’s bill to parliament, setting out what he describes as a “straightforward, cost effective and fair” plan which would enable leaseholders to purchase the freehold on their properties at a capped rate. The bill, which is due to be debated in parliament on 2 February, is separate from the government’s own leasehold reform plans.

If enacted in its current form, the Leasehold Reform Bill would introduce a new statutory mechanism to calculate the cost of a freehold purchase, capped at 10 times the annual ground rent payable by the leaseholder. The bill would also establish a compensation scheme for leaseholders who received misleading information from sales agents or solicitors when purchasing the property, while leaseholders would no longer be liable for freeholders’ legal costs where a dispute was referred to the property tribunals.

However, few private member’s bills ultimately become law due to lack of parliamentary time, while a consultation on the government’s own leasehold reform proposals closed on 19 September. The government made a number of proposals aimed at cracking down on “unfair and unreasonable” leasehold terms in its July consultation paper, including potentially banning leasehold arrangements on many new-build properties and limiting ground rents so that they relate to real costs incurred.

Under the leasehold system, property owners own their homes for a fixed period of time, usually for many decades. Leaseholders pay an annual ‘ground rent’ to the freeholder of the property, which usually increases at a rate set by the freeholder. In recent years, ground rents have increased significantly, in some cases doubling every ten years, according to the government’s July consultation.

Leaseholds were historically used for flats with shared spaces and on similar developments. Importantly, in most of these historical cases, buyers will have received a discount on the purchase price that they paid for their leasehold home to reflect the fact that they were not purchasing the freehold interest in the property, according to property disputes expert Nicola Charlton.

“This discount justified the tenant being required to pay an annual ground rent together with an additional sum if it wanted to buy the freehold before the end of the lease," she said. "In order to ensure that the amount payable to buy the freehold was fairly calculated, legislation was put in place many years ago which prescribes the formula that must be used. This gave the market certainty as to the income that could be received from leasehold properties making ground rents an attractive long term secure investment for companies and pension funds alike. If this bill is passed in its current form, it is likely to impact significantly on the value of those investments.”

“There is no denying that the leasehold model has problems which need addressing, such as the increasing level of ground rents and the use of disproportionate rent review mechanisms, both of which have only been seen more recently. But these are wider than the matters that Madders’ bill seeks to address and a holistic approach, which has regard to all the issues, needs to be taken in order to avoid unintended consequences," she said.

“We look forward to seeing how the government has balanced all of these issues when they publish their response to the consultation,” she said.

The full text of private member’s bills is not usually published until close to the second reading debate, so few details of the Leasehold Reform Bill are currently available. However, in his speech to parliament, Madders said that the new formula would be “set out in statute” and based on ground rent and the number of years left on the lease, with a cap on the maximum payable.

It is not clear whether the mechanism would repeal or replace the statutory mechanisms currently in place. For example, the 1967 Leasehold Reform Act already gives leaseholders the right to buy the freehold of their house, provided that they pay a premium which is calculated in accordance with the formula set out in the legislation.