Leasehold house sale ban - Ground Rent - Management information fees – the prospect for further reform, i.e. around the premium payable for a lease extension or the freehold.
This article looks at the status of the reforms announced so far around the sale of houses of a leasehold basis, ground rents in new leases, the fees payable by leaseholders for essential information needed on sale and the potential changes to the premium payable for a lease extension or freehold.
Leasehold house sales ban, Zero ground rent & sale information – partially implemented
In 2018 the then secretary of state for housing communities and local Government Sashid Javid announced a “crack down on unfair leasehold practices” that would include “new measures announced to cut out unfair and abusive practices within the leasehold system including a ban on leaseholds for almost all new build houses”. His successor James Brokenshire announced in June 2019 that the Government would:
- Abolish the sale of new houses on a leasehold basis.
- Reduce ground rents on new leases to £0.
- Require that management information needed by a seller be provided by the landlord within 15 working days for no more than £200.
- Adjust Help to Buy to remove funding for houses sold on a leasehold basis and enable house buyers wrongly sold leasehold to be given the right to acquire the freehold at no extra cost. The original plan to reduce ground rents to a cap of £10 per annum was dropped. A date for the legislation was not set.
Legislation has only been introduced with regard to the reduction of ground rents in new leases (Leasehold Reform (Ground Rent) Act 2022). While the Government has provided more detail in its response to the consultation around the balance of the proposals it remains for legislation to be introduced in this regard.
The Leasehold Reform (Ground Rent) Act 2022 restricts the level of ground rent in most new flat leases from 30 June 2022. For retirement home leases, the provisions will not take effect before 1 April 2023 to allow the retirement sector time to adjust.
Once the Act comes into force the permitted rent will be nil in effect (technically one peppercorn per annum). Different rules apply in respect of shared ownership leases and replacement leases.
The Act will only assist those buying flats after the Act comes into force. For those who already hold a flat under a lease that requires payment of a ground rent their obligation will continue unaffected. So those with ‘onerous’ ground rents still have an issue. That said the wider reforms of the leasehold law currently under consideration may enable those ground rents to be bought out more cheaply in future.
Some types of lease aren’t caught by the restrictions however it is very restricted i.e. certain business leases, statutory lease extensions of a house or flat, Community Housing leases and Home finance plan leases.
Further Reform - awaited
The government’s April announcement around the above ground rent legislation makes reference to the wider reforms of leasehold law that are under consideration “The move forms the first part of the government’s reform package that will make homeownership cheaper, fairer and more secure. Future measures, announced last year, include a new right for leaseholders to extend their leases to 990 years at zero ground rent and an online calculator to help leaseholders find out how much it would cost to buy their freehold or extend their lease.” These are promised for later in this Parliament.
In addition the Government has previously stated that it proposes that:
- Marriage value is to be scrapped potentially for all leaseholders but this remains to be seen. This is currently payable for example by flat leaseholders where their lease has less than 80 years to run. It can be a large component of the premium payable. It remains to be seen whether any of the rates below are to be set in a way that goes toward compensating the landlord for the loss of marriage value.
- The rates used to calculate the balance of the premium payable to the landlord namely “the term” and “the reversion” may be set at levels that favour leaseholders, i.e., the rate used to calculate the sum required to compensate for loss of a ground rent income stream. The amount of ground rent taken into account may be capped.
- Commonhold is to be reformed and a Commonhold council established with a view to the widespread take up of Commonhold.
- Development value can be avoided by leaseholders instead accepting a restriction on future development.
It remains to be seen which of the Law Commission’s recommendations and valuation options the Government opts to proceed with. They may make it much cheaper for flat owners to extend their lease. That said flat owners with leases that have less than 80 years left to run risk being penalised if they wait for the reforms only to find that marriage value is not scrapped or it is made up for in other changes such as the deferment rate.
Valuation - awaited
So how might the premium payable by leaseholders for a lease extension or the freehold change? The Law Commission issued its “report on options to reduce the price payable” on 9 January 2020 www.lawcomm.gov.uk/project/leasehold-enfranchisement/.
Their terms of reference were “to examine the options to reduce the premium (price) payable by existing and future leaseholders to enfranchise whilst ensuring compensation is paid to landlords to reflect their legitimate property interests”.
They put forward three alternative options for the valuation framework. As the Government has recently announced marriage value will not be payable it seems likely that scheme 1 is to be implemented with one or more of the sub options. In the example given in the Law Commission’s summary document (P17) the premium was reduced from circa £16,500 to circa £9,000 under scheme 1.
The calculation of the value of the remaining parts of the premium namely the term and reversion rely on a capitalisation rate and deferment rate respectively. The former is used to calculate the sum that would currently represent the value of the ground rent income stream to be lost and the latter to reflect the fact that instead of receiving the benefit of vacant possession of the property in the future the landlord will receive money compensation now.
By changing those rates the level of premium can be reduced. Only a small change is needed to make a big difference in the premium payable; In the example given in the summary (P18) a 1% movement in favour of the leaseholder in respect of each of these rates would produce a saving to the leaseholder of broadly speaking 20%. Moving them in the other direction by the same amount has a broadly similar upward effect on the premium.
The amount of ground rent taken into account when compensating the landlord for the loss of that income stream may be capped to exclude the element above that set by the Government as “onerous” which may be set at 0.1% of the freehold value of the property. This could have a strong effect on the premium payable; the example given in the report with a ground rent of £300 per annum doubling every 10 years for example would experience a reduction in the premium payable from circa £79,500 to approximately £6,200.
Development value which is most commonly payable by a group of leaseholders collectively acquiring their freehold i.e., to reflect the value of building further floors or flats on top of the existing block can be a significant element of the premium. The Government has indicated they will enable leaseholders to avoid paying this where they are prepared to accept a restriction on future development instead.
Differential pricing for different types of leaseholder, i.e. by reducing the premium payable by owner occupiers – the Government made no mention of this in its press release but that doesn’t close off entirely the possibility of the detail around their proposals including this. They might attach this pre-condition to marriage value being disapplied and/or the application of preferential rates so as to head off the risk of a human rights challenge by landlords.
There may be unintended consequences of the reforms around enfranchisement;
Those leaseholders who stand to save significant sums may withdraw their properties from the sales market to take advantage of the saving before returning with their improved asset so leading to a paucity of supply in areas with a high concentration of short leases.
Leaseholders who collectively acquired their freehold in the past may find that they receive less than they banked on from those who did not participate originally when they call for an extended lease under the new framework.
Buyers of second-hand properties may prefer zero rent leasehold properties so forcing those with rents to act.
While leaseholders may on balance be pleased it may be of little comfort for those who cannot wait for the reforms to come into effect.
Leaseholders may opt to withdraw from current claims but then lose out if the reforms are not as beneficial as they hope.
Hopefully the detail will be published soon around the Government’s response to the Law Commission’s reports in this regard.