From the ground up

There has been rightful consternation about excessive ground rents in long leases of residential property, and the possible conversion of long leases to assured shorthold tenancies (ASTs). However, this does not warrant the possible approach suggested in the government’s recent consultation, ‘Tackling unfair practices in the leasehold market’, of prohibiting most new-build houses from being leasehold. Such a change could have a significant impact on the market. The government should think carefully before making structural changes to the market that could have unintended consequences, especially at a time when there is a need for new housing.

The consultation document provides little evidence of what impact this change might have, and whether it would discourage private sector investment in developing new housing. The government should commission market and valuation research to understand better the consequences of such a change. It is noticeable that there is no impact assessment in the consultation for the proposals.

There are conveyancing advantages to using leasehold structures, particularly in relation to enforcing covenants between successor landlords and tenants. Freehold is more inconvenient for the enforcement of the benefit and burden of positive covenants by and against successors. The Law Commission’s consultation, ‘Easements, Covenants and Profits à Prendre’, proposed new mechanisms to overcome the difficulties, but the proposed legislation has still to be brought into force. Commonhold as it currently stands is unwieldy and has hardly ever been used.

Leases provide an effective and flexible mechanism for covenant enforcement between landlords and tenants – an important reason for some new-build houses being leasehold. Leasehold structures are also well suited to shared services or facilities, such as where a house forms part of a larger building, or for estates of detached houses with communal areas and services. Such benefits should not be lost by a broad-brush approach of stopping new-build houses from having leasehold tenure.

A key theme emerging from the consultation is that consumers often don’t understand the implications of being granted a lease. The government and stakeholder groups should be applauded for the efforts that they have made in the recent past to produce information to help consumers understand better the commitments they take on with a lease. This educational campaign should be continued and broadened, with government and stakeholder groups coordinating their efforts. However, this lack of understanding by consumers, while regrettable, does not justify the proposal to prevent most new-build houses from being leasehold, certainly in the absence of further investigations and empirical evidence.

As to whether there should be a ground rent in new residential long leases, the continued availability of a reasonable and transparent ground rent that is moderately increased over time is a potentially important incentive for developers of housing. One option is to link the initial ground rent to the price paid for the leasehold, so that the ground rent cannot exceed a prescribed percentage of the price paid. Increases to the ground rent over the term could be linked to increases in a government-recognised index, such as the retail prices index, and the review periods could be longer. Such a moderate ground rent ought not to cause undue prejudice to consumers, but is equally likely not to disincentivise developers and investors in housing. The government should test this through further research and surveys.

There is a serious and legitimate concern highlighted by the government about long leases becoming ASTs as a result of the ground rent exceeding the £250/£1,000 annual level. This is an unforeseen and unintended consequence of increasing ground rent levels over the decades. It is inappropriate and disproportionate that the mandatory ground of possession under section 8 of the Housing Act 1988 should apply to long leases. For such leases, if there are rent arrears, the tenant and its lender must have the opportunity to seek relief from forfeiture by the landlord, and there are existing statutory restrictions on the ability to forfeit. Without those protections, the landlord would receive an unjustified windfall, and the interests of consumers and their lenders would be severely prejudiced. The government should seek valuation advice from stakeholder bodies on what would be the appropriate length of term of lease in excess of which section 8 would not apply.

In conclusion, this is a very important consultation. While it offers some helpful proposals, some aspects could have negative consequences for the development of new housing and the property industry. The aim of the consultation is to protect consumers, but some of the proposed changes may actually have an adverse impact on them if the changes lead to a more constrained housing supply. The government should consider the views and policies of (among others) lenders to purchasers of residential property, both in terms of their attitudes to new-build leasehold houses, and also to the level of ground rents.