Tackling unfair practices in the leasehold market - the government response

Published 15 January 2018

On 21 December 2017 the Department for Communities and Local Government released its formal response to its consultation aimed at tackling unfair practices in the leasehold market.

But what of the difficulties currently being faced by those already locked into long leasehold interests containing what are now considered to be 'onerous' terms? Rather than legislation with retrospective effect, the Government proposes to help consumers access justice to ensure they are 'compensated where compensation is due'.

Our take

The response is not unexpected and confirms the direction of travel clearly sign-posted in the consultation paper issued last summer. Much will be widely welcomed by consumers, although there will not be any quick fix for those already stuck with onerous leasehold terms.

In this regard the Government proposes to "work with the redress schemes and Trading Standards to provide leaseholders with comprehensive information on the various routes to redress available to them, including where their conveyancer has acted negligently. We will also work with the Law Commission to consider whether unfair terms apply when a lease is sold on to a new leaseholder".

It will be extremely interesting to see how this unfolds. Claim management companies have already been busy touting for business from those affected and clearly do not need any encouragement, but a clearly defined redress scheme may take the wind out of their sails if it dispenses with the need for legal representation for those seeking compensation. This is something that property professionals and their PI Insurers should watch closely in the coming months as further details emerge.

Tackling unfair practices in the leasehold market

Secretary of State Sajid Javid said the response showed that "real action is needed" to bring an end to what he regarded to be practically feudal and totally unjustified practices. Various measures, from the introduction of legislation as soon as Parliamentary time allows through to Law Commission consultation, are proposed.

The response contains a range of measures which include a plan to introduce legislation to prevent the sale of new build leasehold houses, subject to certain exceptions, and to ensure that in the future ground rents on newly established leases of houses and flats are set at zero. The Law Commission will also be tasked with consulting on and introducing a prescribed formula to make it easier for leaseholders to exercise their rights to buy freeholds or extend their leases. Action is also promised to stop leaseholders being classed as assured tenants simply based on the levels of ground rent being paid.

The Government has confirmed that it will:

• bring forward legislation 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. It will still be possible for existing leaseholders to extend their lease, or purchase the freehold, and it will consult on proposals to support leasehold house owners to do this on more favourable terms. It will ensure legislation clearly defines “new build” and what a “house” is to avoid any unintended consequences. Government will also work with UK Finance to address misunderstanding of lending criteria with regards to leasehold properties;
• write to all developers to strongly discourage the use of Help to Buy equity loans for the purchase of leasehold houses in advance of new legislation;
• introduce legislation so that, in the future, ground rents on newly established leases of houses and flats are set at a peppercorn (zero financial value). Costs incurred by landlords for overseeing and appointing a managing agent, or carrying out wider services, can be recovered through the service charge or a marginally higher sales price; to ensure that costs are transparent and reasonable, with leaseholders having a right to challenge unfair service charges through the courts;
• consider how it can support existing leaseholders. A number of developers have introduced schemes to compensate individuals, but these must go further and faster. The Government wants to see this support extended to all those with onerous ground rents, including second hand buyers, and for customers to be proactively contacted. It will be keeping a close eye on progress and will consider measures that could be pursued to take action if necessary;
• 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. It will work with the Law Commission on this and consult on introducing a prescribed formula that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs. And it will also consider introducing a Right of First Refusal for house lessees; aiming to bring forward solutions by summer recess 2018 and new legislation when Parliamentary time allows;
• take action to address the loophole which deems certain long leases, where ground rents exceed certain financial values, to be assured tenancies giving rise to Ground 8 possession risk to ensure that leaseholders are not subject to unfair possession orders;
• legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed use estate can access equivalent rights as leaseholders to challenge the reasonableness of service charges.

There is, however, nothing concrete (beyond the above referred encouragement that developers should do more) for those who find themselves with leases which contain onerous terms, principally in the form of rapidly rising ground rents which can, over the term of the lease, spiral to unacceptable levels.

In addition to this encouragement, the Government merely promises to work with the redress schemes and Trading Standards to provide leaseholders with comprehensive information on the various routes to redress available to them, including where their conveyancer has acted negligently. It will also work with the Law Commission to consider whether unfair terms apply when a lease is sold on to a new leaseholder.

Precisely what this envisages remains to be seen.

In the past year there has been increasing unease that property professions may face a large number of claims resulting from allegedly inadequate advice to those purchasing such leasehold interests. As previously reported, at least one major house builder has created a compensation fund but that has not yet been copied by the entire sector. In addition, a number of companies which have previously acquired ground rents are approaching leaseholders offering to revise the ground rent clauses to link uplifts to RPI, but this is also not something which applies throughout the sector.

How these gaps are plugged remains to be seen and it would be unfortunate, to say the least, if potential professional exposures turned on nothing more than a 'luck of draw' principle, dependent entirely upon whether their house builder or current ground rent owner offered to resolve the problem voluntarily.

Click here to view the government response in full.