In the past few months, there has been considerable media focus on onerous leasehold terms imposed in relation to some new build leasehold properties, including cases of freeholders charging ground rents which increase from fairly nominal levels to many thousands of pounds in the later years of lease terms. Such provisions have resulted in leaseholders unable to mortgage or sell their properties, writes Steph Richards, solicitor, real estate department, Herrington Carmichael LLP.
The Department for Communities and Local Government (DCLG) has now published a consultation on tackling unfair practices in the residential housing market in England. The consultation runs for eight weeks, ending on September 19, and seeks views on a number of proposals.
One of the proposals at the forefront of the consultation is to limit the reservation and the increase of ground rents on all new residential leases over 21 years. Historically, ground rents were set at a nominal level but in recent years the cost of ground rents has risen significantly with shorter rent review periods and in some cases, lease terms which double the ground rent upon review.
The DCLG is seeking to limit ground rents in new leases to a peppercorn rent throughout the duration of the lease. This would clearly diminish the value attributed to the residual freehold and so developers who have charged higher ground rents would cease to enjoy the high returns from the sale of the ground rents that have become commonplace in recent years.
These changes would only affect leases entered into after the passing of the relevant legislation, but the DCLG has indicated they will also be considering how the Government can support existing leaseholders with onerous ground rents. The consultation highlights Taylor Wimpey’s announcement in April 2017 that it is setting aside £130 million for a Ground Rent Review Assistance Scheme and notes that the Government is keen for other developers to follow suit.
It is also likely that mortgage providers will start to follow in Nationwide’s steps after it recently introduced specific lending criteria in respect of the terms of new-build leases. The Council of Mortgage Lenders also published information in June on the issues relevant for lenders and their advisers about lease terms for new build leasehold properties.
The DCLG also notes that the Housing Act 1988, as currently drafted, has the unintended consequence of classing residential leases as assured tenancies where the ground rent exceeds £1,000 a year in London, and £250 a year elsewhere in England. One of the implications of this being that the landlord can seek to end the occupancy by an order of the court and evict the tenant by relying on one of the grounds for possession under the act. Some of these grounds are mandatory eg Ground 8 which covers rent arrears. Therefore, if proven, the court would have no choice but to grant a possession order.
The Government therefore proposes to amend the Housing Act 1988 to ensure that long leases over 21 years cannot be classed as assured tenancies and thus removing the possibility of leaseholders being issued with mandatory possession orders in such circumstances.
If you wish to respond to the consultation, you may do so online at:
For further advice or information on ground rents, new build developments, or any other real estate matter, contact the Herrington Carmichael LLP’s real-estate team: