Should Developers Fear Leasehold Reform?

The elephant in the room at many industry gatherings at the moment is the government’s expected reforms the UK’s archaic system of leasehold which, despite easy dismissals by some developers, is likely to have significant financial repercussions for many of them.

The Ministry of Housing, Communities and Local Government  (MHCLG) has consulted on these reforms and received hundreds of submission from organisations within the legal, investment, land, development and home selling sectors.

Several commitments have already emerged from this consultation albeit so far, no legislation. But much is expected.

This includes a commitment to retrospectively ban the sale of leasehold houses; one of the key and most problematical areas for developers.

Banning the sale of leasehold houses and making it retrospective will create problems for those developers who have relied on them to create a residual and ongoing value within a site.

This has until now been an asset they could sell on, or take an income from, and removing it is going to make financing some sites less viable, particularly those sites which are cut off from high-density urban areas and involve more expensive Section 106 obligations.

Developers who bought sites with these financial streams built into the gross development value are now having to recalculate painfully.

Nevertheless, the logic follows that buyers will have to help fill this financial gap in another way and, most probably, through higher prices.

At a glance

  • Leasehold reform is likely to impact house builders and developers significantly as the opportunity to make money from sites post-completion are reduced.
  • Several areas of the reform have yet to be clarified.
  • A New Homes Ombudsman to strengthen redress for wronged home buyers is also likely and long overdue, a leading legal firm has claimed.

The other key government proposal to be implemented soon includes a £10 or peppercorn ground rent cap compared to the £300 to £700 annual range the government’s own review discovered.

It’s already being implemented by mortgage lenders who, Dealmakerz has been told, are already asking harder questions about what is a fair rent when calculating affordability and, if a leasehold includes an unfair ballooning ground rent, refusing to lend.

Also, the government wants to introduce  more transparent charge structures for the maintenance of communal areas, compulsory reserve funds for commonholds, better provision of information to leaseholders by freeholders and a New Homes Ombudsman to tackle the problems of redress for buyers.

Legal view

One of the organisations contributing to the consultations is the Chartered Institute of Legal Executives (CILEx) whose members often work closely with both developers and buyers who are building or buying leasehold properties, from the first planning paperwork to when keys are handed over.

Lesley Price, Head of New Build and Shared Ownership at Lawcomm Solicitors, has spent many hours on its leasehold reform committee, which as well as responding to the leasehold consultation, has been helping steer the government on its proposed New Homes Ombudsman.

“The problem with the system at its simplest level is that buying a leasehold property means wading through very, very complicated paperwork,” she says.

“But most people find this difficult to navigate and in particular first time buyers really have no idea what they are facing, so it’s our job to try and translate it for them.”

Leasehold house ban

Lesley says she and approximately two thirds of her CILEx colleagues disagree with builders who claim that banning leasehold houses will restrict the supply of new homes.

She also says 70% agree with the government that ground rents should still apply to shared ownership schemes and community-led housing and a vast majority believe it should be easier for leaseholders flat blocks to take over the management of their property.

This would reduce the ‘qualifying members’ requirement from two thirds to 50%; abolish the need for 75% residential occupancy and allow shared ownership leaseholders to participate.

Charge cap

One of the other key areas Lesley has been tackling is leasehold charges. Although she and her CILEx colleagues have welcomed the £200 cap and the requirement that the information must be provided within 15 days, she is worried that a loophole remains.

“In cases where there is more than one party responsible for looking after a property the unanswered question is whether they can each charge £200 plus VAT,” she says.

“As it is possible to have up to four parties in some cases being the freeholder, their rent collection agents, a management company and a managing agent, it is still in theory possible for this fee to be payable more than once.

“So where a building is managed by multiple parties the seller still ends up potentially paying multiple fees.”

Alterations consent

Price also says clarification has been requested on whether there will be a cap on the administration fees charged by developers and management companies for consent to alterations, which at the moment are open-ended and can be several hundred pounds for a single piece of paper.

The CILEx solicitors are also worried that the government hasn’t considered carefully enough how those stuck with leasehold houses will be able to convert them into freehold, and that developers will be allowed to introduce this voluntarily rather than compulsorily.

“The government also needs to decide who will pay the legal costs whichever way of doing it is decided upon,” says Price. “It’s still a massive grey area and we get a lot of clients on the phone asking for advice and yet the guidance on this is still quite vague.”

Also, some developers have been offering leasehold house owners voluntary agreements to convert to freehold and there have been several high-profile examples of this, but these present problems.
“Do we tell them to wait and see if they can convert without having to pay fees, or do we suggest they take the offer while it’s on the table,” says Price.

Redressed up

The government is keen to introduce an ombudsman similar to those already operating in the resales market for estate agents and, although there are already several – and possibly too many – codes of conducts, Price is worried that they confuse buyers.

“Often clients come to us and do not know where to complain if they have a problem and are then passed from pillar to post from the NHBC, solicitors, site offices and developers,” she says.

“A central place for information and address is needed and it’s long overdue both to help buyers as well as developers, many of whom are unsure of where their responsibilities begin and end.

And with so many reforms due or expected to leasehold, Price says this can only be a good thing.

You might also like