Mark Chick is a head of Landlord and Tenant at Bishop & Sewell LLP and a director of ALEP (the Association of Leasehold Enfranchisement Practitioners).
The Government has published its Housing White Paper entitled ‘Fixing our Broken Housing Market’ and this has developed some interesting themes and set some pretty ambitious targets.
A small amount of the White Paper looks at matters that concern long leasehold ownership and some of my thoughts on the main themes affecting long leasehold appear below. A full copy of the White Paper can be found at here.
The relevant paragraphs concerning long leasehold appear at 4.36-4.38.
Leasehold Houses
The White Paper plans to look at possible ‘abuses’ concerning developments of new leasehold houses and promises to look at stopping increasing and onerous payments on leasehold houses.
Whilst this might seem like a laudable objective and there have been some well-reported instances where the creation of new long leasehold houses with rising ground rents have affected value, my question is how will this be achieved in practice?
Banning the creation of all new leasehold houses is not likely to be a viable option as this would not help situations where there is an ‘overlap’ or ‘undercut’ with a block of adjoining property and the best option is then leasehold.
We have to also look at the reason why there are leasehold houses. Aside from the developer wanting a ground rent, the other obvious reason is that it makes the collection of service charges for common estate property such as private roads etc. much easier.
There are other arrangements that can be put in place (deeds of covenant and rent charges) but leasehold does have its attractions because the duty to perform positive obligations will automatically sit with the current owner without the need for additional documentation.
However, one possible solution could be a restriction on creating any new leasehold house at a ground rent. This would of course require primary legislation.
Ground rents
The White Paper also promises to look at Ground rents that review at short periods and that have significant increases in leases
This has generated a lot of press interest recently, following on from not only the parliamentary debate on 20th December 2016 and some recent attention from the BBC and Guardian newspaper.
There have been some well reported instances where frequent ground rent reviews – particularly those that compound the amount charged, can lead to a property becoming unsaleable because of the extremely high rent liability.
In one reported case, the ground rent reviews were backdated in the documentation which was not spotted by the purchaser’s solicitors leading to the property being unsuitable for mortgage purposes.
The review periods for ground rents are clearly an area where the ‘consumer legislation’ could be used to some effect.
Options to solve this ‘problem’ might presumably include:-
- Banning the creation of new ground rents in any new residential lease.
- Restricting the frequency of reviews – perhaps to every 20 years – and then also imposing a cap or limit on the rent level that can be set.
However, this is potentially contentious as arguably it restricts ‘freedom of contract’ and people may argue that this moves against a free market in which parties are able to negotiate for whatever length of lease they like with other associated terms.
The introduction of restrictions in this area might also have unintended consequences for shorter term lettings with a premium.
Another option might be to restrict the types of rents that can be paid by way of ground rent to not more than a certain fraction of the open market value of the property with a certain (assumed) long lease term. More radically the introduction of any ground rent in a new residential lease could be prohibited.
What about Commonhold – would that solve all this?
The White Paper states that the government will look at ‘Whether and how to invigorate Commonhold’
For those not in the know ‘Commonhold’ is a different type of freehold land tenure proposed by the Commonhold and Leasehold Reform Act 2002. This would allow the creation of ‘freehold flats’ as part of a residential structure owned by a company in which all the unit owners were members.
As designed it would serve as an alternative to leasehold for residential property divided into flats and would therefore ‘solve’ all of the problems of long leasehold.
However, for a number of reasons, Commonhold has not taken hold. It is often said that there are more books written about Commonhold than actual Commonhold developments and this may well be true.
Not making Commonhold compulsory for all new developments of flats was probably part of its failing. It would be a bold political move, but legislating to make all new developments of flats Commonhold might be the solution.
However, if that were done then there might well be a ‘backlash’ in valuation terms against those living with existing ground rent landlords as these assets might well instantly see these as being much more ‘valuable’ and accordingly the Enfranchisement cost for the remaining leaseholders would need to be considered as a possible policy impact. There might also be a two tier market for properties that were Commonhold against those with existing leasehold structures. The government would therefore do well to look very closely at why Commonhold as designed has not been adopted and it is therefore a valid suggestion in the White Paper that government looks at this again.
Conclusions
There are a lot of laudable objectives in the White Paper and comment elsewhere has centred on the essential difficulty of trying to perform a ‘market correction’ which is in essence what the White Paper sets out to do – in terms of increasing dramatically the supply of housing into the market. Whether this will be achieved remains to be seen.
In terms of leasehold matters, the paper contains just three paragraphs in 104 pages on the subject of long leasehold matters. Whilst these statements are very well-meaning, in the context of the paper as a whole and looking at the likely amount of parliamentary time available, given other small matters such as Brexit, leaves me to wondering how far the government will get in actually implementing any of these steps.
