Reforms to the Residential Leasehold System in England

On 27 June 2019, the Government published its response to the consultation, from October 2018, on reforms to the residential leasehold system in England entitled: “Implementing reforms to the leasehold system in England: Summary of consultation responses and Government response”.  The response sets out the reforms that the Government intends to implement which will have a huge impact on the sale of new houses and the grant of new leases of houses and flats. Landowners, landlords, developers, property management companies, managing agents, purchasers and anyone dealing with residential properties will need to be aware of the extensive changes to be introduced. The Government has announced the reforms but the legislation has not yet been published.  According to the Government, the legislation will be enacted as soon as Parliamentary time allows.

 

There will be a ban on the sale of new leasehold homes so all new houses must be sold as freehold except in limited circumstances.  This will apply to all completions from the date that the legislation comes into force in relation to freehold land.  However, where the land upon which the new house is built is leasehold rather than freehold, the new house cannot be sold as leasehold unless the leasehold land was acquired prior to the date of the original announcement on 22 December 2017.

 

If a new house is sold on a long lease after the ban comes into force, the leaseholder will be entitled to purchase the freehold at no cost on the basis of a “Zero Cost Enfranchisement”.  There will be no limitation period barring those claims as a means of redress.  In addition, powers will be contained in the legislation to introduce civil penalties as a means of enforcement against those selling new houses as leasehold rather than freehold.

 

Some properties will be exempt such as shared ownership properties, retirement properties, some financial products including equity release schemes, community-led housing, new freeholds within an existing estate management scheme, inalienable National Trust land and Crown land.

 

The new legislation, which will define a house, is not yet available but the Government has indicated that a house will include the following components:-

1. building – built or erected structure with a significant degree of permanence, which can be said to change the physical character of the land;
2. single dwelling of living accommodation with or without appurtenant property (such as a garden or garage);
3. self-contained building or part of a building:
   
   • a building is self-contained if it is structurally detached;
   • a part of a building is self-contained if it is vertically divided which means that it does not sit above or below another structure (for example, the Government has indicated that a house constructed above a communal underground car park would not be a house for the purposes of the ban).

The Government intends to extend the statutory rights of first refusal, which currently exist for leaseholders of residential flats under the Landlord and Tenant Act 1987, to leaseholders of houses.  These will apply to new and existing leasehold houses and will mean that a freeholder must offer the leaseholder of the house the opportunity to purchase the freehold upon the same terms as the freeholder intends to make the disposal to a third party. 

Ground rent in new residential long leases
The legislation will require ground rents in all new long leases of residential premises (flats and houses (to the extent a new lease of a house is permitted)) to be a peppercorn of no monetary value (“Zero Ground Rent)”.  This was reduced from the Government’s initial proposal to cap ground rent at £10 per annum.  Again, there will be no transitional period, with the result that the changes will take effect from the date that the legislation comes into force.  This is a huge change from the current position, where a landlord may grant a lease without any restriction as to the amount of ground rent which may be charged throughout the term and many leases currently provide for fixed increases.

Existing leases which were granted before the legislation comes into force will not be caught by the reforms, save where the existing lease is surrendered and a new lease is granted in its place post-implementation of the legislation.  Where a landlord and tenant agree a voluntary lease extension, Zero Ground Rent will apply to the newly extended part of the lease only, so that the existing ground rent is chargeable until the expiry date of the original lease.

It will be necessary to examine the detail of the legislation but the Government has indicated that Zero Ground Rents will apply to variations of the lease which amount to the surrender of an existing lease, however, they will not apply to minor variations of the lease.

Zero Ground Rents will not apply to community-led housing schemes, certain retirement properties, leases granted through equity release schemes and mixed use leases where a single lease covers the residential and commercial parts.  However, if a sub-lease was created for one or more residential units, the Zero Ground Rents would apply to the residential sub-leases but not to the Head Lease covering both residential and commercial parts.  For shared ownership leases, the ground rent for the landlord’s retained equity will be unaffected.

Leaseholders will have the right to apply to the First-Tier Tribunal (Property Chamber) (“the FTT”) to seek a refund for any incorrectly paid ground rent with no limitation period.  In addition, the courts will have a power to impose civil fines of up to £5,000 per property on landlords who set new ground rents above a peppercorn.

Freehold estates
On a freehold estate, freeholders may be required to pay estate charges in respect of services provided to the estate.  A freeholder will have a new right to challenge the reasonableness of estate charges and to apply to the FTT to appoint a Manager (in a manner similar to the rights currently enjoyed by leaseholders of residential properties).

The Government will also consider introducing a Right to Manage for freeholders who own properties on an estate after the Law Commission has separately reported to the Government on wider proposals to reform the existing statutory Right to Manage.

Conduct in sale of leasehold properties

Managing agents and landlords will be required to provide leasehold information within 15 working days.  A maximum fee of £200 plus VAT for providing leasehold information to buyers will be introduced with a mechanism for the fee to be increased under the legislation to reflect inflation.  The expectation, however, will be that the fee will be less than £200 plus VAT and reflect the landlord’s/agent’s reasonable costs.  An additional fee of up to £50 plus VAT may be charged for updating leasehold information already supplied (for example, where a transaction spans different financial years).

Please do not hesitate to contact a member of the property litigation team for specific advice.  This briefing note is not a substitute for legal advice on the specific circumstances of the case.