New proposals on ground rent set to challenge housing developers

New Government proposals on changes to the law on long residential leases will force housebuilders to think carefully about how they structure future developments, a property law expert says.

Related topics:  Finance
Warren Lewis
4th July 2019
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Derek Ching, partner in the development and housebuilding team at Thames Valley law firm Boyes Turner, was speaking after the Government released its response to a recent consultation on the leasehold system and said the plans would see ‘significant and wholesale change’ for developers and homeowners.

Announcing plans for reform of the system, the Housing, Communities and Local Government Secretary James Brokenshire said leases which ‘are unjustified, include onerous terms or unfair conditions, or put corporate profit over consumer protection, have no place in today’s housing market’.

Among the proposed reforms set out in the MHCLG response, the minister outlined plans for:

- A ban on long leases of houses, with only a few special cases as exceptions, and on ground rents for new long leases of residential property
- Owners of leasehold houses (new or existing) to be given a right of first refusal allowing them to buy the freehold if it comes up for sale
- Freeholders on private and mixed tenure estates to be given the same protections against excessive service charges as are currently enjoyed by long leaseholders
- Extension of Right to Manage legislation, which currently applies to blocks of leasehold flats, to freehold and mixed tenure estates
- New rules compelling landlords and managing agents to provide leasehold management information within 15 days of it being requested, to help house sales go through efficiently

- Fees for providing leasehold management information to be capped at £200 plus vat.

Derek Ching, who works with smaller and larger housebuilders across the south of England, said the proposed reforms, which will need to pass through parliament before they become law, would signal a sea change in leasehold property development and sales, and forecast that this may not be the end in terms of greater consumer protection being introduced.

He said: “The housing market is now clearly seen as a place where consumer protection legislation is needed. Adverse publicity over excessive ground rents and mechanisms for large increases in ground rents during the life of a long lease lie behind this proposed Government intervention.

This is a challenge for developers and one that will need to be factored into their future plans, as it is possible that future Governments may decide that further, deeper intervention is needed. Developers will now need to consider, with care, their future policy towards the structure of long leases of residential property.”

Forward-thinking developers now faced a choice, he said, between taking the lead and adapting their long leases ahead of new legislation coming in, future proofing their businesses – or waiting until the new legislation comes into effect, potentially in 12 or 18 months’ time depending on the parliamentary timetable.

“The message to developers is: are you going to carry on as you are and risk losing some or all of your market as buyers increasingly shun new homes with ground rents attached, or are you going to get ahead of the curve by offering zero ground rent leases which will hold their value against future developments taking place after the law changes.”

He said some developers were already offering ‘no ground rent’ flats and others may follow suit. With a huge amount of adverse publicity in recent years around the issue, he said developers may see a benefit in marketing terms of being seen to be one of the early adopters of the new regime.

“Developers who wish to squeeze as much value out of ground rents as they can before the law changes are of course free to do so. They may find that, as the months go by, such tactics may become less attractive to potential buyers, he said.

“It’s a judgement call as to whether a ground rent structure will generate sufficient extra value to outweigh any potential downside of such flats being less attractive in the market and any reputational damage that may occur. Who wants to be known as the last developer charging ground rents on new leases?”

He added that there were no proposals to legislate retrospectively to ban ground rents on existing long leases of houses or flats.

“At the moment, the Government is doing little more than encourage major developers to voluntarily agree variations to such leases and to put aside funds to assist this,” he said.

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