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Government response to leasehold consultation outlines significant proposals for reform

The Government Consultation: Tackling Unfair Practice in the Leasehold Market published in July 2017 outlined proposals to reform leasehold houses and ground rents and sought views on other priority areas for future reform. The summary of the public responses to the Consultation, together with the Government’s own response and conclusions, was published just before the Christmas break in December 2017.

Whilst the Government response does not signal the introduction of any new law or regulation, it is clear that the Government now intends to bring forward legislation to reform a number of key areas as soon as Parliamentary time allows. Details of the proposed reforms are set out below.

Limiting the sale of leasehold houses

The Government has said previously that, other than in exceptional circumstances, it cannot see any good reason for new build houses to be sold on a leasehold basis. Whilst the examples of bad practice, such as escalating ground rents and unreasonable management controls and charges, that have necessitated the perceived need for reform are primarily related to the “new build” market, the Government now intends to introduce legislation that will “prohibit new residential long leases from being granted on houses whether new build or on existing freehold houses”.

The proposed reforms will therefore, subject to any further clarification given a number of apparent inconsistencies in the Government response, apply to all new disposals of houses, not just new builds or redevelopments. This would include the grant of a new lease of a house within a long established estate or development. Very little further detail is available at this stage, save for acknowledgement that any such legislation will need to clearly define terms such as “new build” to avoid any unintended consequences and the full implication of this reform is not therefore clear.

Whilst representations were made supporting the use of leasehold for houses within estates and developments so as to ensure the protection of historic buildings and the upkeep of shared facilities and mutually beneficial positive covenants, the Government appears satisfied that there are existing alternative mechanisms in place to protect such interests.

The only proposed exception is where the subject land is, as at December 2017, already subject to a lease, in which case houses within that leasehold title may continue to be built and sold on a leasehold basis.

Limiting the reservation and increase of ground rents

The Government plans to introduce legislation to limit ground rents in new residential leases of houses (so far as the same are permitted) and flats to a peppercorn (i.e. zero financial value) with landlords encouraged to recover management and other charges via a service charge where appropriate. As with the proposals set out above, this reform is primarily aimed at stopping what has been seen as the unscrupulous use of escalating ground rents and other leasehold provisions to generate income for developers on new builds.

There are no plans to introduce any retrospective controls in respect of ground rents in existing leases. However, the Government has announced that support will be given to tenants of existing leases containing onerous ground rents.

Ability to challenge the “reasonableness” of freehold and mixed tenure service charges

The Government intends to legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities will have the statutory ability to challenge the reasonableness of such charges and therefore have access to equivalent rights to leaseholders to challenge the reasonableness of service charges.

Future areas for reform including enfranchisement and commonhold

Recent Government consultations have included proposals for the further regulation of managing agents and the modernisation of the home buying process. The outcome of these consultations is awaited.

The Government has, however, used the response to this Consultation to go further and outline plans to take action to introduce a “simplified process” for flat owners that wish to buy their freeholds or extend their leases and an intention to work with the Law Commission to introduce a “simple prescribed formula” to help owners enfranchise or extend their lease “on more favourable terms” whilst ensuring “fair compensation” to the landlord. Any such reform, together with plans to introduce a “right of first refusal” for house tenants on the disposal of the reversion of a freehold house, would require significant legislative reform and significant further public consultation.

The Government also plans to reinvigorate commonhold as a form of alternative tenure to leasehold. Whilst most in the industry had presumed that the lack of enthusiasm for commonhold following its introduction in 2002 signalled the end for commonhold, the Government has pledged to “support commonhold get off the ground”.

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