Social Housing Speed Read: Tackling unfair leasehold practices and rights of residents’ associations

Tackling unfair leasehold practices

According to the Department for Communities and Local Government, as of 2014/15 there were around 4 million residential leasehold dwellings in England with 43% of all new build registrations being leasehold, a marked increase from 22% in 1996.

The Government has previously expressed its desire to eradicate what it considers unfair practices in relation to leasehold properties. It specified reforms as part of the Housing White Paper published in February and the Conservative Party manifesto from June’s General Election, upon which the consultation papers have expanded.

1. Properties being sold as leasehold when there was no obvious to require this

New build houses are increasingly being sold as leasehold properties, rather than freehold. The Government has questioned the rationale behind this and criticised the practice as providing a continued revenue stream for the developer rather than being in the purchaser’s interests.

As a result of the continued income, these freehold interests have become more attractive to third party investors, leading to many developers selling the freehold upon completion of the development. The Government’s view is that some developers may have been circumventing the statutory Right of First Refusal, under which they would be required to offer the freehold interest to the lessees prior to offering it to a third party, by entering into conditional agreements to sell the freehold interest prior to the lease to each flat being sold.

The Government has also proposed to restrict the availability of the Help to Buy Equity Loan for leasehold properties. This reform would only allow access to the loan if the sale of the property as leasehold can be justified and the ground rent is deemed reasonable.

2. Unreasonable ground rents

Ground rents were historically set at a peppercorn rent or at a nominal value. However, in recent years the ground rent values have risen dramatically and can start at 0.5% of the purchase price. This has led to an average ground rent of £371 per year for new build properties.

The Government has questioned the fairness of rent review clauses that often allow freehold owners to double the ground rent every 10 years. For example, this could result in a ground rent of £295 per year increasing to £9,440 per year after 50 years.

In order to ensure that ground rent provisions do not become too onerous, the Government proposes a limit on ground rent in new leases. Whilst this is yet to be clarified, the Government has suggested that a cap could be set at a peppercorn rent or by reference to the retail price index (RPI).

3. Unintended consequences

Currently, where ground rent exceeds £250 per year (or £1000 in London) a lease is considered to be an assured tenancy. Therefore, a landlord can seek to evict the lessee by obtaining an order of the court pursuant to S.7 Housing Act 1988. If the rent charge is payable yearly and at least 3 month’s rent falls 3 months in arrears, a possession order must be made (Ground 8, Schedule 2 of the Housing Act 1988).

The consultation suggests the removal of this unintended statutory consequence by (i) exempting leaseholders from the remit of Ground 8 and (ii) ensuring that landlords cannot otherwise begin forfeiture proceedings until ground rent arrears total £350 or have been outstanding for 3 years.

Rights of residents’ associations

A residents’ association already has various statutory rights, for example the right to request from the landlord a summary of service charge costs and also consultation as to the appointment of a managing agent.

The Government is consulting on proposals to allow residents’ associations to request from the landlord information about leaseholders that are not currently members of the association. The proposals would require landlords to actively seek consent from tenants to provide their details to the secretary of the residents’ association. Landlords would be required to provide the information of any consenting tenants, and the number of tenants who have not consented, within 30 working days of the request.

The Government’s proposals allow residents’ associations to enforce these obligations through the First-tier Tribunal, preventing landlords from evading their obligations.

What happens next?

These two consultations end on 19 September 2017. There will be many interested parties, such as developers, investors and residents’ associations, that will be keen to see the outcome. However, it is unlikely that any major reforms will be forthcoming in the near future as there will be a 12 week period for the Government to report on the outcome of the consultation prior to any policy decisions being made. Whilst the position remains uncertain for the time being, we will provide further updates following the outcome of the consultation.

If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.