Apr

Reform proposals could trap leaseholders in their properties…

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Leasehold reform:

Following a couple of consultations the government has published its report on leasehold reform which is indicative of the flavour of the legislation due to be enacted soon, though understandably the current health crisis my delay this indefinitely.

One of the main
options suggested in the report is the adoption of the percentage
rule, that is ground rents must not exceed 0.2% of property value, or
0.1% for new build properties. Doubling ground rents would be
acceptable provided they do not double more frequently than every 20
years and this does not continue to double beyond 125 years. Fixed
increase ground rents would not be allowed to exceed more than
double.

However, writing for
Mortgage Finance Gazette, Geraint Evans, director at Bureau
Property Consultants says that adoption of this rule would result in
“the resurrection of the mortgage prisoner,” harking back to the
credit cunch of 2008.

“The adoption of
the 0.1% ground rent rule by lenders for leasehold properties could
pave the way for a new class of mortgage prisoner, trapped in a home
they cannot sell or remortgage, says Mr Evans.

“Pointing to the
discontinuity caused by the continuous change in housing minister’s
(we are now on the 10^th minister in 10 years) Mrn Evans
thinks it’s no “wonder certain proposals are having an unruly
impact on consumers and the market.” he states.

For a long time now,
more and more developers have been incorporating increasingly higher
ground rent payments into their leases when they sold new build flats
and houses, often to unsuspecting first-time buyers who now find
themselves trapped in homes they cannot sell.

Ground rent payments
were subject to frequent reviews and increases, often doubling or
linked to inflation, so whilst this was very attractive to long-term
ground rent investors, leasehold homes became more difficult to sell
or finance.

In addition, buyers
then found that high service charges, one-off and unexpected bills,
permission charges and high enfranchisement or lease extension
charges where not unusual. This and the uncertainty surrounding the
pending reforms brought caution and uncertainty surrounding both
property leasehold and ground-rent sale valuations.

It now looks like
the government’s intentions surrounding the future of ground rents
and leasehold reform are becoming clearer. The Law Commission review
and a House of Commons Select Committee has clarified the position
somewhat on the potential legislative changes. This would include
plans to ban future leases on new build houses, a legal clamp down on
unjustified costs, provide rights for leaseholders to challenge
payments and implement regulation to review charges faced by
leaseholders and freeholders.

The government has
said it plans to create a compulsory new homes property ombudsman
service which will include a code of practice to deal with
leaseholds, service charges and mixed tenure estates.

Its not clear
whether the legislation will include existing leases retrospectively,
especially those with “onerous ground rents,” though currently
this is said to be unlikely.

Many lenders
currently have a ground rent lending policy for individual flats,
which Mr Evans’ warning is addressing. Nationwide is one of the
toughest lenders is this market, stating they will not lend where the
ground rent is more than 0.1% of the value.

The Law Commission’s
report aims to simplify the way in which premiums are calculated and
reduce these, and is amongst a number of what Mr Evans calls “very
sensible conclusions,” but, he says, there are some unworkable
suggestions that must be addressed.

“Its specific
assertion on ground rents that surpass 0.1% of the freehold value of
properties being onerous is extremely problematic for leaseholders
trying to sell their homes. Lenders are simply not approving
mortgages on such properties because of this onerous label.

“The creation of
mortgage prisoners was one of the lesser-known consequences of the
2008 financial crisis. After the crash, regulators and banks scaled
back their lending criteria, which meant those trying to get a
mortgage would be faced with tougher affordability tests,” Mr Evans
states.

“Fast forward to
today and the adoption of the 0.1% ground rent rule could pave the
way for a new class of mortgage prisoner. The report outlines that it
is “widely considered” that any ground rent which exceeds 0.1% is
“generally considered onerous”; an assumption that appears to be
based entirely on a single factor: that Nationwide Building Society
will not lend on new-build properties where the ground rent exceeds
this rate.”

2019 Government report on Leasehold Reform: the future of ground rents, service charges and selling practices

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