This is a copy of an article published on the RIBA website on 2nd August 2017  

A clampdown on leasehold abuses has been announced by Communities Secretary Sajid Javid, with the launch of a consultation on the outlawing of leaseholds on new build homes and the merits of restricting ground rents to zero.

The recent practice adopted by some volume housebuilders of selling on freeholds to third parties complete with clauses allowing for regular increases in ground rents that will have to be borne by house purchasers has been denounced by MPs as the ‘PPI of the housebuilding industry’.

The government is expected to end the practice of leasehold sales of new homes on all sites where the developer is not obliged to use them. Photo © Nick Free

The British Property Federation has sided with consumer groups to come out strongly against the practice, reporting that traditional freehold owners of leasehold flats have been aghast at the use of leasehold on houses for the purpose of raising unreasonable ground rents.

Taylor Wimpey, meanwhile, has broken ranks with the top ten house builders to publicly apologise for its use of leasehold house sales and has set aside £130m to assist purchasers burdened with high ground rents.

The House Builders Association, representing small and medium-sized house builders, argues that ground rent can have a legitimate role to play for the adoption of roads, sustainable drainage costs, maintenance of common spaces and so on as long as fees are fair and reasonable.

The DCLG’s eight-week consultation is actually a request for industry views on leasehold and ground rent practices rather than a set of firm government proposals aimed at eliminating house leaseholds and all-but-peppercorn ground rents.

It also makes clear that it is looking at the case for banning the sale of new build leasehold houses only on sites where the developer would not be obliged to use leasehold, such as on Crown land or sites acquired from public bodies.

Andrew Drury, managing director of affordable housing consultant HATC, says there can be good arguments for allowing reasonable leaseholds for houses, such as the enforcement of certain obligations on occupiers and controlling future development in order to maintain the amenity value of a new estate.

He points out that it is difficult to make positive covenants on freehold properties enforceable.

‘An alternative approach might be to permit the use of leases for houses, but restrict the sale of the freehold estate to a company owned only by the leaseholders. This would look very much like Commonhold,’ says Drury.

He also warns that regulating leasehold rents, or making their collection unenforceable, would scupper the current shared ownership model. In order to differentiate between leases granted by a private housebuilder and those by a registered social landlord, the law would need to change to introduce the distinction.

‘There is a long-established investment market in ground rents and the current problem seems to stem from a bright spark in a house builder’s land buying team realising that they can generate a significant increase in their GDV if the ground rents are not nominal, and if they increase reasonably quickly,’ says Drury.

As for redress, Drury argues that the finger should also be pointed at the solicitors and valuers who advised the purchasers, although some would have been recruited by the house builders themselves.

‘Rightly or wrongly, the housebuilders are the only people in a position to provide quick redress to the leaseholders. They should stump up, and quickly,’ he concludes.

Thanks to Andrew Drury, managing director, HATC.

Text by Neal Morris. This is a ‘Practice News’ post edited by the RIBA Practice team.