Shortly before Christmas the government issued its response to the consultation on unfair practices in the residential leasehold market. The consultation was opened amid concerns that some developers were using leasehold structures unnecessarily with the aim of extracting high rents from their tenants.
Leasehold properties have their place in English residential property law. Once a piece of land is sold freehold it can become more difficult (although not impossible) to enforce positive covenants – i.e. a requirement to take positive action such as maintenance and repair work against anyone owning neighbouring land. In the case of blocks of flats in particular, it is vital that tenants can rely on the landlord's covenants to look after the block and, for everyone's benefit, the landlord should be able to enforce other covenants against the tenant.
It is standard for ground rents to be collected from tenants of leasehold properties. These are usually in the region of anything from a peppercorn to a couple of thousand pounds a year depending on the value of the property. In the case of a block of flats this could be the only income which a landlord will receive in respect of that block. Some developers have included rent review provisions in their leases which double the rent every few years. For example, a £500 pa rent doubling every 10 years would be £256,000 pa after 100 years. Even taking inflation into account this might be considered a little excessive.
The government intends to:
- Ban the grant of new residential long leases on houses (subject to some exceptions yet to be confirmed).
- Set ground rent on all new leases at a peppercorn
We await the flesh on the bones of this proposal but it will be interesting to see how it will affect the market. With ground rent income reduced, one might expect lease lengths to diminish to produce better capital returns for landlords by way of lease extension premiums, however, the government has indicated that it will look at introducing a minimum lease term for new long leases on flats (in addition to banning leasehold houses).
By reducing the benefits to a landlord in owning a block of flats might this also reduce any interest the landlord has in a block? Despite lease covenants requiring maintenance and repair and the ability to recover the costs of doing so, where would be the incentive if there is no continuing value to the landlord? Consequently we may find that the number of right to manage and collective enfranchisement claims (where the tenants purchase the freehold collectively) increase as tenants seek to deal with block maintenance themselves.
Although "share of freehold" is often seen as a positive, this means that tenants must agree amongst themselves about the amount to spend on repair and maintenance of the block: it is often seen as preferable for a group of tenants to take enforcement action against a third party landlord to maintain the block rather than against each other. Increasing the number of blocks maintained by the tenants won't necessarily increase tenant satisfaction with the state of repair and maintenance of those blocks.
How far should the government go? By reducing rents this might reduce the use of leasehold structures to where they are properly required and so render the banning of certain leaseholds unnecessary, but might the reduction to a peppercorn be counterproductive?
In the government response Sajid Javid states that "it's clear to me that real action is needed to end such abuses and create a system that works in the best interests of consumers. And that is exactly what the government will deliver"
Our hope is that the government will strike a balance between the interests of the consumer and those of developers and landlords. Each one is reliant on the other, and tipping the balance too far may ultimately prove to be damaging.