Residential Property Experts Say Consultation ‘A Welcome Move’ But the Devil Will be in the Detail

Leading national law firm Irwin Mitchell’s property experts are calling the Ministry of Housing’s latest consultation on implementing leasehold reforms a welcome move overall, but retain some caution over implementation.

The consultation, announced this week follows the recommendations made by the Law Commission’s earlier call for evidence to address a number of significant issues that buyers and sellers face in the housing market. In particular it focuses on: the use of leasehold houses in new developments, the impact of high ground rents and the fees linked with getting information when properties are sold.

The consultation proposes that future ground rents are capped at a nominal £10 per annum. On one hand this will ease the buying and selling process and remove the current problems facing lenders where Assured Shorthold Tenancies have been unwittingly created by exceeding the rent limits. However, as Brian Dowling, Senior Associate at Irwin Mitchell pointed out, “A properly administered ground rent can often incentivise effective management of leasehold property. There is an attraction to having a stable, indexed long-term income from an asset and it is arguably more transparent to describe this as a rent than try and recover a profit element from providing services under a service charge”.

“It does not seem that a compelling argument has yet been made to justify ground rents or argue that the rate of increase should be capped. This consultation seems like the last chance for developers and investors to do that.”

A second aspect of the consultation indicates that the sale of leasehold houses will not be banned altogether as there are some justifiable circumstances where the use of the leasehold system will be necessary to ensure management of common facilities on a new development. Shared ownership properties, community-led housing and certain sites on Crown and National Trust land will be exempt from any ban on new-build leasehold houses. This may also be extended to retirement housing and sites with complex infrastructure.

Brian Dowling commented, “If the democratic decision is made that ground rents should no longer be chargeable on long residential leases then the only reason for having long leasehold houses is when it is essential to ensure that a shared structure or infrastructure is effectively maintained, or to secure the long-term use of a house in accordance with charitable purposes. This view seems to have registered, which is encouraging. In particular, retirement living developers, community land trusts, and co-housing groups will be encouraged, as they all have their own reasons for wanting to sell leasehold houses.”

 “The devil is in the detail though and it is important that developers and investors make the case for using leasehold when the structure of a development scheme demands it. Examples including having duplex homes above shops or commercial space, or having houses above shared underground car parks.

One further element of the Government proposals which will be welcomed by house owners, is the proposal for equivalent rights to be given to freeholders to challenge reasonableness of freehold service charges or estate rent charges for maintenance of common areas which are currently only available to leaseholders.

Dowling commented, “It is not clear though that freehold house owners on new or recently built estates face the same problems with escalating or opaque charges that a number of leaseholders have faced. In particular, the service charges are typically low because few services need to be provided- often just minor roads and planted areas. It is also common practice for the house owners to eventually control the management company following the sale of the last house on the estate.

“If these rights were introduced, they may impact more on groups of neighbouring owners who need to keep their estates looking smart and have to negotiate amongst themselves, rather than on consumers dealing with management companies, as at present.”

The consultation further seeks to ensure that information packs required for the transfer of ownership of leasehold properties is provided in a timely manner by managing agents and freeholders. This is move welcomed by Irwin Mitchell.

Marcelle Turner, Associate and specialist residential leasehold lawyer in Irwin Mitchell’s Leasehold Enfranchisement Team said, “Investing in leasehold property can be risky for those who are not properly informed.  Many buyers are unaware and often confused as to their rights and the correct legislation which applies to their property.  The consultation seeks to align some of the procedures which will benefit both freehold and leasehold owners although current owners will not see any change to their existing leases.”

The consultation will run for six weeks and closes on the 26th November; Irwin Mitchell will be submitting a response.