Double Trouble and the Government Response
Usually houses are sold as freeholds where a purchaser buys the building and the land it stands on outright. In some cases, houses are sold as leasehold. This may be appropriate for some houses for example because they are on National Trust land. However, in other instances it seems that new build houses are being sold on a leasehold basis to create an income stream for the freeholder from the ground rent, or to generate additional income from the sale of the freehold interest or a lease extension at a later date.
A purchaser of a new build house will often be granted a long lease of up to 999 years and will also pay an annual 'ground rent' to the freeholder. These may be nominal rents where no money is actually collected by the freeholder often a 'peppercorn' or more whimsically 'one red rose'. There has however been a recent trend towards a starting ground rent of £200-£600 a year doubling every 10 years.
It has been well reported that tenants of these properties are now finding that they are struggling to sell their properties due to the fact that a number of lenders are now refusing to lend on properties with rent reviews like this or similar and there is fear that more will follow suit. It is important to note that this issue does not apply only to houses and many new-build flats also have doubling ground rent clauses where the same problem is arising.
Communities Secretary Sajid Javid has set out plans to ban new build houses being sold as leasehold as well as restricting ground rents to as low as zero and the government’s Housing White Paper ‘Fixing our broken housing market’ highlighted the government’s aim to improve consumer choice and fairness in the leasehold sector. This consultation, which closes September 2017, looks at a range of measures to tackle unfair and unreasonable abuses of leasehold; in particular, the sale of new leasehold houses and onerous ground rents.
The consultation also seeks views on excluding leaseholders from possession orders because of arrears of ground rent; and views on freeholders being able to challenge service charges for mixed tenure estates with shared facilities.
We eagerly await the outcome of the consultation but in the meantime speculation is rife that government intervention may lead to another compensation scenario of the likes seen with PPI with major housing developers setting aside substantial funds to cover legal disputes.
Adam is a senior associate in the Residential Property team.