Following the release of the latest Committee report into the housing industry and developers’ use of leasehold sale transactions, many landlords are concerned that the government’s response could impact their businesses. The Committee are concerned that in too many transactions where properties are sold by long leases (for perhaps 99 or 125 year terms, and sometimes longer), such leases contain onerous terms that purchasers often fail to appreciate.
So, what were the Committee’s findings, what has been the initial reaction of the housing sector, and what is the likely next move of the government?
The findings
Produced by MPs sitting on the Housing, Communities, and Local Government Committee, the report has caused alarm amongst many in the housing industry. Tasked with examining abuses of power in the leasehold system, the committee issued a damning indictment of what it perceived to be serious flaws and widespread exploitation of purchasers of long leasehold properties.
It found that almost half of new leaseholders in the past decade were unaware of the exact terms of their lease and that many were trapped in agreements that favoured landlords too greatly. A study conducted in 2018 showed that 94% of those who bought a long leasehold property regretted doing so and that 62% felt that they were mis-sold the deal.
The Committee was particularly concerned by how purchasers of new build properties – largely first-time buyers – were being sold long leases that featured high service charges, burdensome ground rents, and unaffordable lease extension rates.
The response
Initially, the government has issued a partial response, addressing some of the key concerns raised in the report. It includes the intention to introduce legislation to prevent leaseholders from being forced to pay the legal costs of the developers they take to court over high service charges.
It also argues for the implementation of a new statutory code of practice for those who hold long leases of retirement properties. This aims to protect vulnerable property owners and their families from unjust financial burden. The government is expected to formulate a comprehensive plan within two months.
The housing industry has been quick to respond too. Several property developers have agreed to eradicate the common practice of ‘doubling clauses,’ where ground rents increase rapidly over a relatively short period of time. Many developers have also agreed to change the terms of existing long leases.
The implications for landlords
Whilst no new legislation has been passed that will affect the legal position of landlords, the government has signalled its intention to do so in the near future. The Committee report recommends that ground rents payable under existing leases should be capped at 0.1% of the value of the property and limited to £250 per year. This could have a significant effect on those who hold agreements where ground rent is payable. However, it must be emphasised that this is only the Committee’s recommendation and not yet government policy.
The report also mentions the need for greater transparency in the sale process, as well as the importance of providing all buyers with more comprehensive information regarding their purchase.
If put into practice, the ideas contained within the Committee’s report would result in an enormous shake-up of the existing long leasehold system. However, there is currently no evidence that the government has the appetite to adopt these reforms. Landlords will have to wait to see just how far the government is willing to reform the leasehold system when it responds in full. However, it’s clear that developers will be under increasing pressure to do away with exploitative long leases.
