Leasehold market reform on a ground-breaking scale

24th April 2019

Walker Morris has monitored and periodically reported on the Government’s review of perceived unfairness within the leasehold market and the potential reinvigoration of commonhold as an alternative to leasehold ownership [1].  On 19 March 2019 the Housing Communities and Local Government Committee (HCLGC) published a report which offers wide-ranging and ground-breaking recommendations which aim to redress the balance in favour of leaseholders and could completely overhaul a significant proportion of residential ownership within England and Wales.

It is anticipated that the Government will respond shortly. Walker Morris will continue to report on the progress of the leasehold market review – including whether/when any proposals will be implemented.  In the meantime, some of HCLGC’s suggestions for change are so extensive that interested parties – including land owners, housebuilders/developers, Local Authorities/social housing providers, conveyancing solicitors, managing agents and leaseholders themselves – would be well-advised to consider how the proposals might affect them.

Some of the key recommendations are summarised below.

Future of leasehold

• The Government should ensure that commonhold becomes the primary model of ownership of flats in England and Wales. While it may be necessary for some retirement properties and the most complex mixed-use developments to retain some leasehold ownership, the majority of residential buildings should be commonhold.
• The sale of leasehold houses should cease and incentives to build leasehold properties (particularly monetary ground rents and permission fees) should be limited.

Mis-selling

• The significant differences between freehold and leasehold property are not made clear enough to potential purchasers. To help address that, the term ‘leasehold’ should be replaced with ‘lease-rental’.
• A standardised ‘key features’ document should be provided at the outset of the sales process and should very clearly outline the tenure of a property, the length of any lease, the ground rent and any permission fees. It should also prominently specify a price at which the developer is willing to sell the freehold within six months (or, otherwise, a prescribed statement that the developer is not so willing and that the purchaser would have to rely on statutory rights).
• The right of first refusal should be extended to leasehold house owners.
• The loophole which allows developers to sell freeholds to subsidiary companies (meaning leaseholders miss out on the opportunity to purchase the freehold at the price offered) must be closed.
• The Competition and Markets Authority (CMA) should investigate accusations of mis-selling in the leasehold market within the next six months and, where appropriate, make recommendations for compensation/enfranchisement.
• The offering of financial incentives to persuade a potential purchaser to use a particular conveyancing solicitor should be prohibited. The Government should also review whether a new scheme should be established for leaseholders with claims against their solicitor.

Onerous lease terms

• Developers should publish clear data on the numbers of leasehold houses and flats they have sold with ground rents exceeding 0.1% of the value of the properties and the Government should determine the scale of the problem of onerous ground rents.
• It would be legally possible for the Government to legislate retrospectively to remove (or limit to 0.1% of the present value of the property and never to exceed £250), onerous ground rents in existing leases and/or to establish a compensation scheme.
• Ground rents in new leases should be set at a peppercorn. Leaseholders generally receive very little in return for their ground rent and ground rents are both an impediment to commonhold and they give rise to the risk of forfeiture.
• Permission fees in new-build leasehold properties should not exceed the true administrative costs incurred by freeholders. Retrospective legislation to remove/limit onerous permission fees in existing leases and/or a compensation scheme should be established in the same way as for onerous ground rents.
• The CMA should indicate its view as to whether onerous leasehold terms are unfair and unenforceable and the Government should establish a clear route for leaseholders to be appropriately compensated.

Service charges, etc.

• The Government should require the use of a standardised form for the invoicing of service charges to leaseholders, which breaks down the charges into identifiable individual parts and makes clear where commission has been paid and in what proportion. Similar provisions should apply for freehold owners who pay for the maintenance of communal areas and facilities.
• Sections 42A and 42B of the Landlord and Tenant Act 1987 should immediately be brought into force to regulate sinking funds.
• A consultation process should be implemented for leaseholders in privately owned buildings such that proposed major works [2] only proceed with the consent of a majority of leaseholders or the authorisation of a Tribunal.
• A Code of Practice should be introduced for local authorities and housing associations, outlining their responsibilities to leaseholders and best practice for major works. Local authorities should also be required to administer sinking funds for buildings for which they are responsible.
• The Government must legislate to require that freeholders’ Tribunal costs can never be recovered through service charges or other means when a leaseholder has won the case [3].

Enfranchisement

• It is not always clear to leaseholders that there is a statutory route to enfranchisement and lease extensions. Freeholders should be required to provide an estimate of the statutory cost of enfranchisement/lease extension when informally making any offer.
• The Law Commission should recommend a process that will make enfranchisement substantially cheaper and the Government should introduce a low-interest ‘Help to Buy’ loan scheme so that any leaseholder that wishes to enfranchise or extend their lease can afford to do so.

Other

• The Government should implement a Specialist Housing Court and Housing Ombudsman Service to provide a coherent route to redress for leaseholders and should review the Leasehold Advisory Service with a view to maximising the service provided to leaseholders.
• The Government should immediately take up the Law Commission’s 2006 proposals to reform forfeiture [4].
• Much of the existing leasehold legislation in England and Wales is not fit for purpose. The Government should therefore invite and fund a comprehensive Law Commission review.

For further information or advice on how HCLGC’s proposals may affect you, please do not hesitate to contact any of Walker Morris’ Housing and Real Estate experts.

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[1] See our earlier briefings for more detailed background information: https://www.walkermorris.co.uk/publications/newsflash-government-response-leasehold-market-review/; and https://www.walkermorris.co.uk/publications/consultation-on-commonhold/
[2] with a threshold of £10,000 per leaseholder
[3] unless the leaseholder has behaved unreasonably
[4] See our earlier briefing for further information: https://www.walkermorris.co.uk/publications/real-estate-matters-august-2015/the-end-of-forfeiture/