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Government confirms ban on majority of new-build leaseholds

The government has confirmed its plans for banning the majority of new-build leasehold houses in England, while capping ground rents on new leases at just £10.18 Oct 2018

Its technical consultation on the proposed reforms, which were first announced in December 2017, provides more details on the types of new-build properties which will be exempt from the general ban. These include developments that were already subject to leasehold tenure on or before 21 December 2017; shared ownership leases with 'staircasing' options; community-led housing, including community land trusts; inalienable National Trust land, and excepted sites on Crown land.

The government has been working with the property sector to consider any further exemptions to the general ban where these are necessary. It has, for example, confirmed its commitment to the development of housing for the elderly in specialist retirement villages, where housing is provided alongside packages of support, care and hospitality services as well as extensive communal facilities, and is seeking further views from developers and operators as part of the consultation. However, it has not gone so far as to say that housing for the elderly would be a further exemption.

The consultation closes on 26 November 2018, and will be followed by a written response from the government. It is running alongside the Law Commission's lengthy consultation on reforming the law around leasehold enfranchisement, which closes on 20 November 2018.

Under the leasehold system, property owners hold their homes for a fixed period of time, usually for many decades. The leaseholder pays and annual 'ground rent' to the freeholder of the property, which usually increases over time at a rate set by the freeholder.

Leaseholds have traditionally been used for flats with shared spares and on similar developments, with this status reflected in a cheaper purchase price for the property. However, of the 4.2 million residential leasehold properties recorded in England in 2015-16, only 2.9m were leasehold flats, according to government figures.

The consultation confirms that the government will introduce legislation prohibiting the use of leasehold in new-build houses other than in exceptional circumstances, backdated to 21 December 2017. As the prohibition is currently only an intention with no legal status some developers may continue to grant leases of houses as the law continues, for now, to permit them to do so.

The government is minded to cap ground rent at a nominal sum of £10 annually, which it intends to specify in the legislation. It also intends to legislate so that leases must specify the date on which the annual rent is payable, and to prevent landlords from demanding rent that was payable in a previous year. It is seeking views on whether retirement properties should be permitted to charge more than £10 ground rent to enable them to recover the capital cost of providing shared spaces, provided that purchasers are given a choice either to pay a lower initial purchase price with more ground rent or to have a capped ground rent but a true market purchase price.

Agricultural tenancies will not be affected by the ban, nor will business tenancies of the sort covered by Part II of the 1954 Landlord and Tenant Act. The ban will be policed by the Land Registry at the point at which it is asked to register a non-compliant lease. This may be on first registration, on the application of a legal charge, or on assignment of the lease.

"By capturing all dealings at the Land Registry, non-compliant leases will be rooted out where they were granted after 21 December 2017 but registered before the law abolishing them was put in place," said leasehold reform expert Paul Pinder of Pinsent Masons, the law firm behind Out-Law.com. "In these situations, homeowners will be able to apply to cancel the lease and have the freehold transferred into their name."

Other issues covered by the consultation are potential changes to the enforceability of positive freehold covenants, to ensure that fees payable for ground maintenance and other service charges are fairer and more transparent.

"Under leases, residential tenants can challenge the charges that they are asked to pay and make an application for an assessment as to the true liability for service charges to the first-tier tribunal," said Pinder. "The government now looks ready to move this already understood area of leasehold service charge law into the freehold covenants/estate rent charge arena."

"As part of this, it will be interesting to see whether the government will consider bringing fixed service charge fees under the same level of judicial scrutiny as varying charges.  Those fees charged in the Supreme Court case of Arnold v Britton provided the landlord with returns many times exceeding its actual costs for the services provided.  Fixed fees that only increase pursuant to a stepped increase over the term, a mathematical formula or by an index comparison such as the retail prices index are a loophole that prevents a residential tenant faced with an inflated bill from challenging it. To me this would seem something that the government may wish to throw in to the mix," he said.