Government proposes to restrict unfair ground rents and end unfair leasehold practices

The government is proposing to set ground rents to zero levels and close several legal loopholes in a bid to reduce the current abuse of leaseholds carried out around the UK. The government’s plans include banning new build houses sold as leasehold, and changing the rules on Help to Buy equity loans so that the scheme can only be used to support new build houses on acceptable terms.

Under some residential leases ground rents can double every decade, crippling home owners and in some cases making a property impossible to sell. It is estimated that there are currently 1.2 million cases of leasehold homes which have seen ground rents rise dramatically over the duration of their term, in some reported cases increasing to thousands of pounds per year.

Leaseholders own their homes on lease for a determined period to a freeholder, often paying ground rent to that freeholder. Clauses in the lease can, however, cause dramatic increases in these ground rents, which come on top of management charges for the upkeep of communal areas. This system of ownership has lasted for a long time, especially in blocks of flats. Traditionally houses have nearly always been sold as freehold, meaning that the buyer owns the building and land it is built on outright. However in recent years the trend for new-build houses being sold as leasehold as accelerated significantly.

To rectify these issues the government is seeking views on proposed new rules for leasehold properties. These would specify:

• banning the sale of new build leasehold houses where the developer is not obliged to sell a house on a leasehold basis

• restricting ground rents on new leases to a ‘peppercorn’—meaning it has no financial value

• how to tackle existing onerous ground rents

• possible changes to the Help to Buy scheme in relation to leasehold houses

• providing freeholders on private estates with equivalent rights to leaseholders to challenge unreasonable service charges for the upkeep of communal areas and shared facilities

The proposals could have far-reaching and major implications for new tenants. A ban on new homes being sold as leasehold would also give homeowners more freedom regarding their property. Currently, leaseholders must ask for permission from the landlord to make changes to their property and may have to pay a fee. This requirement would fall away if all homes were sold as freehold.

Towards the end of a lease, it is very difficult to sell or mortgage a property which has a short lease term lease remaining. An additional benefit of the proposed ban would be that home owners would not have to think about applying to extend their lease, or applying to buy the freehold – both of which can cost several thousand pounds.

A consultation on the proposals closes on 19 September 2017.

Matt Rice
August 2017

Blog by Area of Expertise