Today’s news that the government is entering into a consultation period proposing to ban new build leasehold houses and limit the levels of ground rent amounts/reviews has been expected for some time. The issue of “unfair” review terms (predominately reviews where the ground rent doubles) has been the subject of substantial media coverage over the last 12 months and has logically encouraged the government to intervene.
The main issue has been where new build developers (the likes of Taylor Wimpey, Bellway, Bovis etc) have sold their houses leasehold instead of freehold even though they owned the freehold of the site. This enabled them to sell the individual leases to a freehold investment fund at multiples of up to 35 times generating a higher profit on that plot than if they had sold the house freehold. Whist this may not have been an issue with low levels of ground rent and “reasonable” reviews it did become an issue when ground rents of £250 per year and above became the norm and (even worse) the reviews allowed this ground rent to double every 10 years. This would result in some homeowners paying around £10,000 by 2060 rendering their houses unsaleable, or at best, not worth what they had paid for them
In relation to flats/apartments these need to be sold leasehold but again a reasonable level of ground rent and a sensible review was “the norm” 10 years ago but is now abused by many developers with ground rents of £500 and doubling reviews becoming more prevalent.
As a company that is actively involved in advising on new developments and an expertise in lease terms/ground rent advice it has always amazed us that developers began selling new houses leasehold. Very often they were sold to first time buyers who did not understand the terminology nor the consequences of the leases something which has now forced the government to act. It is almost certain that the government will ban reviews other than those linked to RPI on a 10 year or longer pattern and limit ground rent levels to a peppercorn rent (very low to nominal).
Just as with the proposed banning of tenant fees (another item from the government’s housing white paper published in Feb 2017) the greed of a few developers will spoil it for the rest of the industry and will probably force the government to tighten the legislation more that they would have should developers not acted in such a manner.