The government has just provided a fairly detailed indication of what steps it is to take to approach, what it sees, as unfair practices relating to rents on leasehold property and the sale of leasehold houses.

Ground rents will be restricted to a peppercorn in future leases and new long leases of houses will be banned, subject to limited exemptions.

THE BAN ON GROUND RENTS

What ground rents will be banned?

Ground rents in new leases of flats (and, where permitted, leases of houses) granted after the legislation takes effect will be set at a peppercorn (nil), which effectively means that ground rents will be abolished completely on all new leases.

When and how will the ban be implemented?

It is not expected that there will be any transition period. The ban on new ground rents will come into force on the date the legislation is brought into effect.

Will there be any exemptions?

Ground rents will be permitted in leases of retirement properties and community led developments, because the government believes ground rents are important methods of funding these types of developments. Mixed use leases, where a single lease covers both commercial and residential, will be exempt.

There will be no exemption for shared ownership properties. Neither will there be any exemption for replacement leases following a surrender and re-grant. However, to avoid tenants having to pay higher costs on lease extensions, the ground rent will be allowed to continue under the replacement lease, but only for a duration equivalent to the unexpired period of the previous lease.

How will the ban be enforced?

Any ground rent above nil will not be legally enforceable. Leaseholders will have the right to apply to the First-Tier Tribunal to seek a refund for any incorrectly paid ground rent and any associated costs, with no time limitations. Freeholders who charge prohibited ground rent will be liable to fines of up to £5,000 per property.  The Secretary of State will have the power to increase this for repeat offenders in future.

THE BAN ON NEW LONG LEASES OF HOUSES

What leases and houses will be covered by the ban?

The ban will apply to leases of more than 21 years of both newly built and existing freehold “houses”. The definition of "house" will be finalised during the drafting of the legislation. However, the government has made it clear that flats will not be caught by the prohibition on leasehold sales.

When and how will the ban be implemented?

It is not expected that there will be any transition period. The ban will apply as soon as the legislation comes into force and it will have retrospective effect in relation to any leasehold land acquired after 21 December 2017.

Will there be any exemptions?

The ban will be subject to limited exemptions. These exemptions include, but are not limited to, shared ownership properties and community led developments, as well as retirement properties, financial lease products and agricultural tenancies.

Tenants of exempted leasehold houses (whether new or existing) will be granted a statutory right of first refusal. This will give them the chance to buy their freehold before a landlord sells it to a third party.

How will the ban be enforced?

The government says that purchasers of leasehold houses sold after the effective date of the legislation, will be entitled to have the freehold title to their house transferred to them at no cost. The onus is on developers to market properties correctly and they will have to bear the costs of rectifying the position.

To avoid purchasers being left with invalid leases, the government has dropped the consultation proposal that defaulting leases should be incapable of registration at the Land Registry. However, an applicant for registration of a new lease will have to declare that it is compliant with the legislation. Invariably it will be purchasers' solicitors making such a declaration and the onus will fall to them to ensure new leases comply.

There will be no time limit for purchasers to bring claims against developers for the transfer of the freehold, as the government believes purchasers may not necessarily become aware of the issue for many years following their purchase. Although the government considers that this will be a sufficient deterrent for developers, the legislation will also allow the Secretary of State to introduce future additional fines if required.

Watch this space!

Concerns have been expressed that the changes could lead to further increases in house prices. Developers may need to charge more for properties to offset lost ground rent income. This would, of course, work against the government's aim of encouraging more people onto the housing ladder.

We now have to await the publication of the draft bill before we have a complete picture of what is proposed. This will be done ‘as soon as Parliamentary time allows’, and there are plenty of other distractions for Parliament at the moment! It is therefore hard to see how any legislation could be in force before 2020 at the earliest.

For more information, please contact Susan Fox, Senior Litigation Executive, on 01435 897297 or susan.fox@kdllaw.com.

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