Preparing for the results of the Consultation on ‘Leasehold’ Houses

At the end of July the Government announced a new consultation on the ownership structure of new build Homes in England, following the surge in recent years in new build Leasehold houses.  Historically, Leasehold interests (for a fixed term of years) are reserved for flats in blocks or houses split into flats, as a neat way of distributing and managing the repair, maintenance and insurance obligations between the tenants and the Freeholder.  Conversely, a freehold is a perpetual estate in land which, in the absence of restrictive covenants or estate ‘rent charges’, are not subject to regular payments to a reversionary owner.  

The Government is of the view that the use of Leasehold houses has resulted in ‘unfair charges’ and ‘onerous terms’ being imposed on homeowners including excessive ground rent increases, that have made some homes impossible to sell because the ground rent is expected to hit £10,000 a year by 2060.  Communities Secretary Sajid Javid has dramatically claimed “Enough is enough.  These practices are unjust, unnecessary and need to stop.”

The consultation is expected to take eight weeks, so the first waves of direction should be surfacing in the coming days/weeks.  However, it is highly anticipated that the consultation will seek a ban on the practice of selling leasehold houses.  In addition whilst it is expected that any proposals made will only affect future sales, it remains to be seen whether there could be any retrospective effect for those caught by these recent practices.  It has been reported that some high profile house builders have already begun setting aside large sums of money in anticipation/preparation of any retrospective effect of this consultation.  There is speculation that compensation (similar to that involved in the PPI repayments), maybe available.

Whilst we will need to wait and see what the consultation proposes, it is envisaged that the consultation will have effect on a number of people.  Two groups who will want to keep a close eye on developments will be:

1. Purchasers: those who have already purchased a leasehold house, and find themselves with similar situations as above.  They will be particularly keen to know if there is any retrospective effect of the proposals.  There is numerous speculation as to what they can expect, ranging from compensation, to some form of enforced variation to the terms of the lease, or even a change to the rules on statutory lease extensions to remove the loss of rent element for the Landlord from the calculation and thereby reducing the cost of extending a lease.  In any event, there appears to be some pressure to soften these practices to benefit those already caught; and

2. Developers: Those who have in recent years built and sold houses on a leasehold basis, with onerous cost clauses, or rents which increase rapidly during the term.  This is likely to affect current developments whereby ‘informed’ buyers will be wise to the structure and may not be willing to part with their cash, thus resulting in a restructure of how the properties are sold.  Developers will want to start taking steps now, either to put aside funds (as some house builders are doing), in preparation to pay for the possibility of retrospective claims, or start to consider how to restructure their sales of leasehold houses to alleviate the cost burden to the purchaser, yet still ensure that some residual value remains, for investors. 

For now, it will be business as usual, but it would appear the ‘end is nigh’ for leasehold houses and their attractiveness for developers/investors, much to the satisfaction of homebuyers.