Developers: Changes to the Leasehold Market are Imminent. What Do You Need To Think About?

In 2017, the Government consulted on the operation of the leasehold system in the UK. Reforms are now imminent. Developers should be aware that this issue is on Parliament’s action list: new legislation to ban leaseholds is coming “as soon as parliament can enact it”.

Back in January, Victoria Marshall from our Conveyancing Team wrote about the Government’s consultation into the leasehold market from the point of view of leaseholders. This article looks at the issues from the developers’ viewpoint.

Why do developers sell houses as leasehold?

Leasehold has been part of the UK landscape for generations. It is commonly used in those buildings with shared fabric and infrastructure such as a block of flats. Selling properties with leasehold ownership is also a developer’s means of building houses where they do not own the freehold on the land.

But some developers have abused the leasehold system, for example by charging large ground rents. Following a recent consultation into the issues, the Government agrees with leaseholders that reform is needed.

The Leasehold consultation – from the developer’s viewpoint

The Government received a huge response to its 2017 consultation on leasehold houses and ground rents - largely from people with experience of buying and living in leasehold properties.

The results of the consultation showed:

• many think the use of leasehold is unjustified and requires reform;
• an overwhelming consensus that new build houses should not be built or sold as leasehold – effectively a leasehold ban; and
• arguably, in most cases it is unnecessary for houses to be built as leasehold: it is a feudal practice and simply the means for developers to boost profits.

What action is the Government taking?

Following that consultation, the Government:

• is to bring forward legislation “as soon as Parliamentary time allows” to enact reforms to the leasehold system”. The Government intends that this legislation will prohibit new residential long leases from being granted on houses where they are new build or existing freehold houses;
• is to initiate a wider programme of reform which includes: making it easier and more cost effective for all leaseholders to enfranchise i.e. buy the freehold title to the properties; and the introduction of better regulation of managing agents;
• is to introduce a minimum lease term to give leaseholders greater security and protect them from incurring costs on lease extension;
• has made clear that Help to Buy is not to be used to support the sale of leasehold houses;
• is to set at zero ground rents on new long leases to deal with concern that historically low ground rents have risen significantly in recent years; and
• wants to ensure that consumers only pay for services that they receive.

In advance of the new legislation, the Communities Secretary has been writing to all developers to strongly encourage their disuse of Help to Buy Equity Loans for the purchase of leasehold houses and will be “keeping a close eye on progress”.

Possible exception to the leasehold ban

The Government is considering whether any particular cases of leasehold houses can be justified as an exception to the planned ban. Even if they do identify such exceptions, they will work with relevant partners in the house-building sector to ensure they are provided on terms acceptable to the consumer.

What should developers do now?

The proposed reforms represent a significant shift in favour of leasehold owners.  Developers who have, until recently, developed new build houses for onward sale as leasehold must review their approach to such sales. In particular, there will be no scope for earning income from selling leasehold titles to third parties.

Contact

For more information on preparing for the new legislation banning leasehold properties, contact us on 0161 684 6951 or make an enquiry.

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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.