News

The Government has now concluded its consultation on unfair leasehold practices and has reached the following conclusions:

• Legislation will be brought forward as soon as Parliamentary time allows to prohibit new residential long leases from being granted on houses, whether new build or on existing freehold houses. There is likely to be an exemption for shared ownership, some Community Land Trusts, or other specific developments.
• In the future, ground rents on newly established leases of houses and flats will be set at a peppercorn (zero financial value).
• The Government will also:
  • Consider whether unfair terms apply when a lease is sold on to a new leaseholder.
  • Consider introducing a Right of First Refusal for house lessees.
  • Work with the Law Commission to make it easier for leaseholders to be able to exercise their right to buy their freehold, or extend their lease, and for this right to be available as soon as possible. The Government will prioritise solutions for lessees of houses. The Government will consult on introducing a prescribed formula that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs. The Government will aim to bring forward solutions by summer recess 2018 and new legislation when time allows.

There is an obvious focus on new-build properties implicit in these measures, which detractors warn may create a two-tier leasehold system with the worst-affected, existing leaseholders struggling to sell their properties as a result.

With respect to the loss of leasehold as an option, there is now a possibility that developers will shift to what has been derogatorily termed the 'fleecehold' model. This is where houses built in private estates are subject to estate management fees under covenants. Property owners own the freehold to their house but are forced to pay often escalating fees with much less accountability than is provided by the leasehold system.

With respect to changes to ground rent on new flats, freeholders could hypothetically recoup lost rent by introducing into leases measures such as index-linked management fees. There would, however, unlike ground rents, not be compensation due to freeholders for the loss of such fees when a freehold is purchased by the leaseholder. This is because the fees relate to a management service which would no longer be provided after purchase. As more of the income from freeholds becomes invested in management and service fees, it is possible that freeholders will become more resistant to the sale of freeholds.

The most important area of the Government's reforms is hence likely to be that which is currently least defined - the reform of the valuation of lease extensions and freeholds, and the legal processes employed by leaseholders to obtain them.