Residential leasehold - time for change?

At the end of July, hard on the heels of the Housing White Paper published in February, DCLG issued a Consultation Paper on "Tackling unfair practices in the leasehold market". If you wish to make your voice heard prompt action is needed - the period for responses expires on 19 September.

The main points which are proposed to be covered in future legislation are:

• Cutting back on the future sale of freestanding houses on a leasehold basis (unfair fees have been charged for extensions etc), save where there is good reason to protect local character or amenities.
• Limiting the charging and increase of ground rents on new flat leases over 21 years in duration (recent publicity has focused on ten-year doubling of rents which, if not capped, can reduce the price or even make the flat unsaleable).
• How can we make the (little-used) commonhold regime fit for purpose? Briefly, this combines ownership of a freehold unit with membership of a corporate body which manages the common parts. A commonhold community statement is an essential feature, much of which is standard.
• What else should be done to tackle "abuse of leasehold" (to adopt DCLG's wording)? This may include reform of existing leasehold terms and a review of the cost of acquiring the freehold (known as "enfranchisement").

This Consultation is very much about protecting the interests of the consumer who was either not made fully aware of the true cost of buying a leasehold interest (on top of paying the original price) or who was sold the property on a "take it or leave it" basis, with no ability to negotiate the terms of sale. First-time buyers would have been particularly vulnerable to the latter practice and may not have been properly advised.

The banning of the future sale of leasehold houses is an "easy win" but unravelling what has happened in the past (if, indeed, that is to happen) will inevitably have a cost attached. Several housebuilders have already started to consider how to put things right and one has set aside a fund to assist in converting the "ten-year doublers" to less onerous terms.

The Consultation Paper's radical proposal for new leases is to move away from monetary rents and instead charge a peppercorn. However, this is going too far – a landlord is required under any lease to give the tenant "quiet enjoyment" of the premises (an archaic expression meaning the tenant's possession is not to be disturbed) as a last resort if, for example, the management company goes bust.  This covenant comes at a cost if the building falls into disrepair and the landlord has to step in to sort things out – this would not happen if only a peppercorn rent was payable.  Also, the landlord has the right to get the property back at the end of the lease term, subject to a tenant's statutory renewal rights, so has a continuing interest in ensuring that all tenants comply with their covenants (which is of mutual benefit for the tenants).

A sensible compromise for new leases would be for a rent of say 0.1% of the initial capital value of the flat to be charged on grant and increased not more frequently than every 10 years, in line with RPI (or another appropriate index). This would keep the rent the same in real terms and still provide an incentive for the landlord to perform its duties under the quiet enjoyment covenant (as above).

It also needs to be borne in mind that ground rents form the basis of support for many pension funds and any reduction in the level of ground rents generally will impact on those funds, and indirectly on pensioners. A full impact assessment will be needed, involving all aspects.

We have prepared a more detailed briefing paper on the topics covered by the Consultation Paper. A copy can be emailed to you on request, so please contact us if you would like one.

Author: Martin Dawbney, Partner, Real Estate, London

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