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Ban on 'almost all' new leasehold houses in England to have retrospective effect, says government

New leasehold arrangements on "almost all" new-build houses in England will be banned, while 'ground rents' on new long leases will be reduced to zero, the government has announced.05 Jan 2018

The package of leasehold reform measures, which follow a recent government consultation, also includes plans to make it cheaper and easier for existing leaseholders to purchase the freehold on their property. The government will also take action to ensure that leasehold property cannot be classed as an 'assured tenancy' just because the ground rent had increased above a certain threshold.

The ban on new leasehold houses will require primary legislation, the effect of which the government intends to back-date. It will prevent developers from avoiding the ban on new leasehold houses by taking new leases of development sites themselves after 21 December 2017, the date that the consultation response was published. However, whether the retrospectivity will go further than this and ban the sale of leasehold houses altogether after 21 December 2017, subject to limited exemptions, is not entirely clear. The government has stated that it: “will ensure that future legislation to ban the sale of leasehold houses applies to land that is not subject to an existing lease at the date of publication of this consultation response" and that it will "continue to work with the sector and other partners to consider the case for exemptions to the policy and its retrospective application”.

"Given previous comments made by the government on this issue and recent adverse press highlighting some undeniably unfair and unreasonable terms that appear to have been imposed by some developers, the announcements are not surprising," said property disputes expert Paul Pinder of Pinsent Masons, the law firm behind Out-Law.com. "The government's detailed response acknowledges, however, that exemptions from the ban on the sale of leasehold houses will be required, but it appears to still be formulating what those exemptions will be."

"The next step is for draft legislation to be brought before parliament. This is when we will see what exemptions are being proposed and, in particular, how these might impact on existing developments or contractual arrangements. While parliamentary time is tight due to Brexit, given the high profile of leasehold reform we anticipate that the government will prioritise this legislation, and we could see a draft in the next few months," he said.

The government said that it had received "overwhelming support" for its proposals across over 6,000 responses to its consultation, which it published in July. The consultation was prompted by recent growth in the sale of leasehold houses, as opposed to flats, as well as significant increases in ground rents.

Under the leasehold system, property owners own their homes for a fixed period of time, usually for many decades. The leaseholder pays an annual 'ground rent' to the freeholder of the property, which usually increases at a rate set by the freeholder. Leaseholds have traditionally been used for flats with shared spaces and on similar developments, with this status reflected in a discount on the purchase price of the property. However, of the 4.2 million private sector residential leasehold properties recorded in England in 2015/16, 1.4 million were leasehold houses, according to the government.

The government intends to legislate to ban the sale of leasehold houses on land that is "not subject to an existing lease at the date of publication of this consultation response". It will consider how best to "support existing leaseholders", secondary buyers and others subject to "onerous" ground rents, by encouraging the expansion of developer-led compensation schemes, and will introduce standards to provide leaseholders with "comprehensive information" on the various routes of redress available to them.

As envisaged, the ban would apply to all houses unless "exceptional circumstances" apply, such as where the house is built on land with specific restrictions. The government also intends to "discuss the case" for other limited exemptions with developers and the property industry. The government will write to developers before the planned legislation is in place to "strongly discourage" the use of Help to Buy equity loans for the purchase of leasehold houses, and to encourage them to provide redress to those with onerous ground rent terms.

Property disputes expert Nicola Charlton of Pinsent Masons said that the wording of the consultation response "suggests that, in the first instance, the government will be looking to developers to establish voluntary compensation schemes to assist leaseholders with onerous ground rent terms".

"If, however, the government feels that the sector is not doing enough, the inference is that it will take further action," she said.

The government also intends to make it easier for leaseholders, particularly leaseholders of houses, to exercise their right to buy their freehold or to extend their lease. It will also consider introducing a 'right of first refusal' for leaseholders of houses. The government will work with the Law Commission to develop a proposal, while also consulting on the introduction of a prescribed formula which would provide fair compensation to the landlord for the loss of the lease without subjecting the leaseholder to additional court costs.

"The price payable by a homeowner for the freehold of their house, or to extend their lease, is already governed by legislation which sets out a statutory formula that determines the price payable – for example, the price payable to buy the freehold of a house is regulated by the 1967 Leasehold Reform Act," Charlton said. "If a homeowner considers that the price being demanded is excessive, it can challenge the cost in the FTT."

The wording of the government's response implied that it would amend the current legislation, which has been criticised as being "complicated, costly and time consuming", Charlton said.

"If this is the case, it will need to consider the impact of such changes carefully," she said. "For example, ground rent portfolios have been an attractive long-term secure investment for pension funds, other institutional investors and the public sector alike."

"Changes to the current statutory formulae and/or processes will almost certainly impact on the value of existing residential ground rent portfolios, even if they are ring-fenced and are not affected by the changes to the law. This is because this asset class may no longer be seen as an attractive and secure investment," she said.

The government intends to work with the Law Commission to make it easier for developers to create legally binding arrangements allowing for the maintenance of shared structures, facilities and open spaces on freehold developments, according to the response. It will also legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed use estate can access similar rights to challenge the reasonableness of service charges as leaseholders.

Property disputes expert Nicola Buchanan of Pinsent Masons said that this wording "suggests that the government may not include an exemption to the ban on new leasehold houses where there is a need to set up an estates service charge to pay for the maintenance of open spaces, play areas, community buildings and communal facilities associated with new housing developments".

"If that is the case, developers would have to rely on the other alternative structures available," she said.

"Unfortunately, however, these other structures are currently not as straightforward to implement and do not offer the same level of protection to both homeowners and developers. They can also be more costly to put in place at the outset, and to administer on future sales," she said.

"The position is not entirely clear, however, given that the press release suggests that there may be an exemption for houses that have shared services," Buchanan said.

"The sector needs clarification on this point quickly given the potential retrospective effect of the legislation, so it is hoped that the government will publish the draft legislation soon," she said.