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Why leasehold reform is essential

With a new government comes a new agenda, but some of the same arguments around leasehold reform continue to rumble on. This is perhaps to be expected, given that the UK uses a system of home ownership that is still rooted in medieval history.

Leasehold reform is a thorny issue and one where the law of unintended consequences can run riot. But one thing that is universally popular among nearly all leaseholders is the power to become freeholders.

It isn’t hard to see why; it gives you more control over where you live, makes it easier to sell your property and eliminates the need to pay ground rent. That’s why the government is looking at all available options to make this as smooth a process as possible.

No easy feat

With various obstacles in the way, this isn’t always easy. It can include getting other leaseholders in the property to agree to your plans, the fear that you’re taking on potentially unknown liabilities and the need to pay ‘development value’ for any benefits unlocked by taking on the freehold.

The first two issues can be resolved through a process of advice and education, reassuring tentative leaseholders of the benefits of taking on the freehold and guiding them through what can seem an arduous process.

The final issue though – related to development value – poses greater challenges. This is where leaseholders taking on the freehold need to pay the incumbent a fee based on the ‘value’ that any development on the property could add. Freeholders are, not surprisingly, keen on getting this fee as high as possible.

Calculating this value is often a fine art, and freeholders who are being made to sell their interest are, again unsurprisingly, keen on getting it as high as possible. However, this can often prevent people from doing something that the policymakers want to facilitate.

One of the most popular ways to add value to a block of flats is to maximise the airspace above it – something that we specialise in at Apex. The current law can discourage this from taking place, however, because of the fear that a big fee will have to be paid to the freeholder.

Given this, we believe any reform should bring forward a commitment for leaseholders taking on the freehold to only pay development value during initial build.

Unlocking value

In the first instance, this will stop the inequitable situation of new freeholders paying money for something they may not want to pursue. And, perhaps more importantly, it also means that if they do want to proceed with any development, they will have a means of immediately raising the cash through the value that they’re unlocking.

As with every mooted change to leasehold, there will be those who say it’s unworkable and unfair to freeholders. However, it’s an essential way to give them more control over their own homes, while helping unlock billions across the UK housing market.

Here’s hoping our policymakers step up to the challenge and creative positive change in a housing market craving modernisation and greater accessibility.

By Arshad Bhatti

Source: Property Week

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Leasehold scandal pushes freehold house price premiums to eight year high

The price premium being paid for a freehold property by home buyers in England and Wales is at its highest since 2011, enhanced by issues relating to leaseholds, new research suggests.

Using property transaction data, estate agents Benham and Reeves found that the price gap between a leasehold and freehold property was 14.3% in 2011, dropping consistently year on year to just 5% in 2014.

It then increased to 6.9% in 2015 and stayed at around this level before increasing last year in the wake of the leasehold scandal. So far in 2019, the gap has widened from 8.3% in 2018 to a notable 12.3% this year.

Freehold has historically been the preferred method of buying as the home buyer owns the property and the land it sits on and isn’t required to pay any ground rent of service charges. It also means you pay lower conveyancing costs when buying.

However, just over a year ago a leasehold scandal saw new homes sold with soaring ground rents as a result of developers selling freeholds on behind the back of sellers, and this has clearly had an impact with homebuyers paying even more to avoid such a situation.

The largest freehold price gaps are in London’s prime market, with Camden home to the highest with a 227% increase while in Kensington and Chelsea, the average price paid for a freehold property is £4.4 million, some 190% higher than the average price paid for a leasehold at £1.5 million.

Home buyers in Elmbridge are paying 159% more for a freehold, followed by the City of Westminster, Islington and Hammersmith and Fulham.

While London is home to the majority of the largest gaps, Chiltern is home to the next largest freehold price premium outside of the capital at 105%, with South Buckinghamshire also ranking in the top 10 with a 92% freehold property premium.

Despite last year’s revelations, there are still two areas where home buyers are paying more for leasehold homes. Tameside and Sunderland are home to an average price paid for leasehold homes some 6% and 4% higher than freeholds.

‘There is no doubt that the leasehold scandal has had a severe impact on buyer sentiment and the amount people are willing to pay to avoid any of the potential nightmares that unfolded last year,’ said Marc von Grundherr, director of Benham and Reeves.

So much so that the premium paid for a freehold home has already hit its highest levels in nearly a decade and will no doubt continue to do so. A freehold is always the preferable path when buying but unfortunately, not everyone can secure themselves a foot on the freehold ladder, either due to a lack of stock or the additional financial cost,’ he added.

Source: Property Wire

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Government announces crackdown on leaseholds for new-build houses

Almost all new-build houses will in future have to be sold as freehold, and ground rents will be capped at just £10 a year.

The Government made the announcement at midnight on Saturday, and a new consultation on the plans will be launched today by Communities Secretary James Brokenshire.

The announcement said that leaseholders currently pay on average over £300 ground rent a year, with some paying as much as £700.

There was no suggestion that the move will be retrospective, implying that some recent home owners could still find their properties difficult to sell.

Brokenshire said: “Unfair ground rents can turn a home owner’s dream into a nightmare by hitting them in the back pocket, and making their property harder to sell.

“That’s why I’m taking concrete action to protect home owners and end those unscrupulous leasehold practices that can cost tenants hundreds of pounds.

“While leasehold generally applies to flats with shared spaces, a number of developers have been increasingly selling houses on these terms – placing further financial burdens on those looking to buy a house of their own through unnecessary surcharges like ground rent.

“This can also mean that selling their home is more expensive and take longer than selling a freehold property.

“Under the Government’s proposals, which are subject to consultation, the majority of new houses will be sold as freehold, and future ground rents will be reduced to a nominal sum.

“The consultation will also seek views on what are the appropriate and fair exemptions, such as shared ownership properties and community-led housing to ensure consumers’ best interests are at the heart of the property market.”

Notably, the announcement made reference to the Tenant Fees Bill, saying that the new crackdown on leasehold practices “builds on action under way to make the property market fairer, including a crackdown on rogue landlords and ending unfair charges for tenants”.

The consultation will run for six weeks and estate agents are among those specifically invited to comment.

Yesterday evening, NAEA chief executive Mark Hayward said:  “Thousands of home owners across the country are facing escalating ground rents, charges for making alterations to their properties and unable to sell their home.

“Therefore, it’s only right that the Government looks to crackdown on unfair leasehold practices to stop even more people feeling trapped in homes they cannot afford to continue living in.

“Our recent Leasehold: A Life Sentence? report found almost half (45%) of leasehold house owners didn’t know they were only buying the lease until it was too late, two thirds (62%) feel they were mis-sold and the vast majority (94%) regret buying a leasehold.

“This shows that for too long, housebuilders and developers have not been transparent enough about what it actually means to buy a leasehold property.

“However, this announcement is only good news for those looking to buy a leasehold property in the future.

“With 4.2 million leasehold properties in England, many will remain stuck in their lease with no straight forward way out and the industry needs to help them.”

Source: Property Industry Eye

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The Government Proposes Radical Reforms To Stop Unfair Leasehold Practices

Shortly before Christmas the Government published its response to a consultation, issued earlier this year, on “Tackling unfair practices in the leasehold market”.

The consultation arose as a result of adverse publicity surrounding the practice of developers selling new-build houses as leasehold properties and the inclusion of so-called ‘market’ ground rents, with onerous rent review provisions in new leases of both houses and flats.

In its response, the Government proposes some radical changes to the way residential homes, particularly new-build houses and flats, can be sold to prevent the perceived abuse of leasehold ownership structures by some developers and landlords.

While the specific details of the proposals and the timetable for new legislation remains unclear, their impact, particularly for developers and investors in residential property, should not be underestimated.

The proposals will be welcomed by those looking to buy new homes, but will be of limited assistance to existing owners of leasehold houses, and owners of leases with onerous ground rent provisions.

The key proposals are as follows:

  1. Ban on the sale of new leasehold housesLegislation will be introduced, ‘as soon as Parliamentary time allows’, to prohibit new long leases of houses from being granted and this legislation will apply to both new build and existing freehold houses. The legislation will clearly define the meaning of ‘new build’ and ‘house’, definitions which many argue are currently ambiguous.

    It is likely that there will be some exemptions, with one permitting the continuation of shared ownership schemes being mentioned in particular. The Government has said it will work with sectoral partners to consider if there are particular cases where leasehold houses can be justified.

    Where land is currently leasehold, so that it is not possible to sell new freehold houses, developers may continue to build and sell leasehold houses on that land. However, to prevent this exception being used as a loophole, such sales will not be permitted where the developer’s lease is created after 21st December 2017 (i.e. the date of publication of the Government’s response).

  2. Limiting ground rent on new residential leases of houses and flatsLegislation will be introduced to set ground rents in all new leases over 21 years of houses and flats to a peppercorn (i.e. zero financial value). Again, an exemption will be made for shared ownership schemes.
  3. Remedies for existing owners of leasehold houses or of leases with onerous ground rentsThe ban on the sale of new leasehold houses will not assist existing owners of leasehold houses. Instead, the Government has said that it will consult on proposals to improve the current statutory rights of leaseholders to buy their freehold or extend their lease so that they may do so on more favourable terms.

    The proposed new limit on ground rents will not apply retrospectively to existing leases with so-called ‘onerous’ ground rent provisions. Rather than legislating to cap these rents, the Government wants to see developers and freeholders offer redress schemes to compensate owners of existing leases with onerous ground rents, and to proactively contact such owners to offer compensation (some housebuilders have already set up such schemes). The Government does not set out what it considers to be an ‘onerous’ ground rent and this remains open for debate.

  4. Assured tenancy loopholeAs a result of landlord and tenant legislation for assured tenancies (Housing Act 1988), there is a technical legal issue affecting some long leases of residential properties with substantive ground rents. The legislation currently provides that where ground rents in a lease exceed £250 per year (or £1,000 per year in London) the lease is classified as an assured tenancy and the leaseholder is an assured tenant. As an assured tenancy, the lease can, in theory, be terminated by the landlord for even small sums of rent arrears as the landlord can obtain a mandatory possession order. This loophole creates problems for owners of affected leases in terms of marketability and in obtaining mortgage finance. The Government will take action to address this loophole and ensure that leasehold owners are not subject to unfair possession orders.
  5. Residential management charges on freehold estatesLegislation will be introduced to ensure that freeholders who pay residential management charges have rights to challenge the reasonableness of such charges, equivalent to the statutory rights that leasehold owners currently have to challenge the reasonableness of service charges.
  6. Further areas of leasehold reformThe Government will consult and will work with the Law Commission on other possible areas for reform including:
    • (as referred to above) simplification of the rights of leasehold owners to buy the freehold interest in their properties, or to extend their leases, with priority given to owners of houses. The Government will consult on introducing a simple prescribed formula that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs. It will also consider the introduction of a right of first refusal (similar to that already available for owners of flats) for owners of leasehold houses.
    • The introduction of a minimum term for new long leases of flats.
    • Looking at ways to reinvigorate the use of commonhold as an alternative tenure to freehold and leasehold.
    • In the longer term, as a consequence of the ban on new leasehold houses, the Government has also said that it will respond to the recommendations contained in the Law Commission’s 2011 Report ‘Making Land Work: Easements, Covenants and Profits a Prendre‘, for reform on easements and covenants to ensure that it is easier for developers to set up freehold schemes with positive obligations relating to estate management and provision of services.

    Whilst uncertainty remains over the details of some of the proposals and exactly when they will be implemented, the Government’s commitment to reforming the leasehold market is seemingly resolute. Wide scale statutory reform can be expected in the future. Developers and investors should be pro-active in their reaction to the Government’s proposals and bear them in mind when structuring and financing new residential schemes.

Source: Mondaq

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Real Estate Update: The Government reacts to Leasehold Issues

In July 2017 the Government published a consultation document in order to obtain the views on the most needed areas for reform within the leasehold market. Over 6,000 replies were received with leasehold houses and ground rents being the most pressing for reform. There were two headline proposals which arose as a result of the consultation document. The Arguments

Pursuant to Section 14(A) of the Limitation Act 1980 (the “Act”) the period in which a claim must be issued before it is statue barred is either, six years from the date on which the cause of action accrued, or three years from the date on which a claimant has the requisite knowledge to bring the claim.

Limiting the sale of new build Leasehold Houses

The Government have previously said that, other than in exceptional circumstances, they cannot see any good reason for new build houses to be sold on a leasehold basis, and their view on this remains the same. The results of the consultation confirm that the Government are planning to bring forward legislation as soon as Parliamentary time allows to prohibit new residential long leases from being granted, be it new build or on existing leasehold houses. However, the Government have indicated that it will still be possible for existing leaseholders to extend their lease or purchase the freehold and the Government intend to consult on proposals to support currently leasehold owners to be able to do this on more favourable terms. The Government have also indicated that they plan to ensure new legislation clearly defines terms such as “new build” and what a “house” is, in order to avoid any unintended consequences and have confirmed that they will work alongside UK Finance more in order to address the misunderstanding of lending criteria which, the results of the consultation flagged, is associated with leasehold properties.

Despite the above, the Government are aware that they will not be in a position to prevent developers building and selling leasehold houses on land that is currently subject to a lease. They will, however, ensure that future legislation contains exemptions in this regard and have confirmed that other exceptions will be considered when the legislation is brought forward, for example if there are particular cases where leasehold houses can be justified, and, if so, to work with sectoral partners to ensure that they are provided on acceptable terms to the consumer.

The Government will, however, ensure that the ban the sale of leasehold houses applies to land that is not subject to an existing lease as at December 2017.

Limiting the reservation and increase of ground rents on all new residential leases over 21 years

Overall, the results of the consultation confirmed that anything that affected the value of the property should be classed as onerous. It was also noted that ground rents can become onerous where leases on houses are extended under the 1967 Leasehold Reform Act. Over 40% of the responses given in the consultation stated that there was no justification for ground rent and no clear reason why these should be any more than a peppercorn, however others cautioned about prohibiting ground rents, indicating that they ensure that the landlords retain an interest in the investment and covered the landlord’s costs.

The Government confirmed their concerns that ground rents have risen from historically small sums, to hundreds of pounds per year in many cases. Although no specific proposals to address onerous ground rents have arisen from the results of the consultation, the Government intend to introduce legislation so that, in the future, ground rents on newly established leases of houses and flats are set at a peppercorn, i.e. have zero financial value. This would result in the costs incurred by the landlord for overseeing and appointing a managing agent being recovered through the service charge or a marginally higher sale price, meaning costs are more transparent and reasonable, with a leaseholder having the right to challenge any unfair service charges through the courts.

Following the results of this consultation, the next steps are for the Government to draft the required legislation and for this to then be brought before Parliament to be considered.

It is worth remembering that the outcome of the consultation document are currently only proposals, however, the high profile of leasehold reforms may result in the Government treating this as a priority.

Source: Lexology