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Leasehold properties: abuse, reform and responsibility


In February this year the government published a White Paper entitled ‘Fixing our broken housing market’. The aim of the paper is to tackle unfair practices in the leasehold housing market and in particular the sale of leasehold houses, doubling ground rents and the practice of selling ground rent reversions to third parties.

There are some genuine reasons for using a leasehold structure for developments of houses – for example, when there are common facilities that require maintenance, for which the owners of houses are required to contribute to the cost.

Ground rents themselves have value as an income stream either for the developer to retain or by selling the entitlement to the ground rent to a third party – often a ground rent investor company. As a result of the recent media focus on onerous leasehold terms for newbuild leasehold houses, many developers keen to avoid adverse publicity have reviewed their policy on the sale of ground rents to third party investors. Some developers are taking a proactive attitude towards this issue and have bought back freehold reversions from investors to sell to individual owners at reduced prices.

This practice of ground rent sales has been brought to public attention as some ground rent provisions contain unacceptable levels of increase i.e. ground rents which double every 10 years, whereby the amount of the ground rent payable can exceed the value of the bricks and mortar of the property before the term of the lease comes to an end. These issues have been taken up by the government in the current review of the leasehold system of property ownership and are now under consultation.

The future

The government and organisations such as the Council for Mortgage Lenders are alert to the issues facing leasehold development, and whilst the government consults to inform longer term consumer-led policy, lenders and other bodies are taking immediate action to protect their own interests.

Consumers are the focus of these consultations and the government is keen to protect them from an unfair system. However, it is important to balance the needs of each interested party, and this is no easy task. Any changes to policy, legislation or lending criteria will have an impact on the market.

What is clear from their findings is that leasehold reform will affect the property market, with developers, freehold owners, and leasehold owners bearing any resulting changes. Although the government’s position has been made clear, there are no immediate changes to current practice. However, lenders may force change through the back door by restricting lending to consumers on newbuild properties, with Nationwide Building Society leading the way in the introduction of new lending criteria for newbuild properties. Lenders may also restrict lending to developers where leasehold properties form part of a development, and will in any event take a keen interest in or provide compulsory terms for such sales.

Practical considerations

There is now a period of uncertainty and developers need to be aware of the impact on saleability of newbuild properties with terms which may be seen as unfair, and may want to review existing contracts with professional advisers.

Consumers who are considering purchasing leasehold properties may find it more difficult to finance such purchases where lending is required, and freeholders and ground rent collection companies might want to review the terms of their agreements with professionals.

It is important to note that whilst there is no real concern over the sale of properties on a leasehold basis, and in many cases this works very well, the substantive terms of some leasehold contracts will need to be amended to reduce the likelihood of a reduction in sales of new properties. CML guidance should be adhered to in order to increase the likelihood of lenders providing the finance to both developers and consumers. If you are unsure of how this may affect you, please contact a professional advisor.

Published: September 2017

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Autumn 2017

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Marcelle Turner