The new Shared Ownership model: The Changes

The long-awaited new form Shared Ownership model lease has finally been released via the updated Capital Funding Guide.  Not only are there changes to the Lease but the CFG has also been updated to reflect these and some minor changes to affordability and sustainability.

The CFG Affordability changes….

These are all minor and seek to clarify points which have been unclear in previous versions of the CFG.   Affordability assessment must now be carried out by a Mortgage Advisor with a suitable level of experience.  This was previously only an option.  It is now clear that when registering with the Help to Buy Agent that they only assess eligibility and not affordability.

Maximising shares is further clarified with the aim of a rate of 45% debt to income being the “standard.”  RP’s can clearly use their discretion if they feel in certain circumstances this is not sustainable for any applicant.

In relation to resales it makes it clear that shares can be sold at the existing level even where a buyer can afford more.  If they can afford a higher share, RP’s should facilitate where possible, bringing resales in line with new build sales.

Unsecured lending is not prohibited under the new model however, this would not benefit from the mortgagee protection provisions in the lease.  This is clearly aimed at people buying very low shares using finance from other sources (e.g. personal loan).  Such applicants would still be subject to the same affordability and sustainability criteria.

The New Model Lease:

Lease Term

Following much discussion and review of Leasehold regulations generally, new leases will be granted for a term of 990 years.   This will avoid future lending issues when lease extensions are required and also brings Shared Ownership in line with the private sale market.

Share Purchased

It has been well publicised that the minimum share will be reduced to 10%, at such a low initial share it will be even more important to ensure affordability and sustainability of long-term ownership.  Much debate has been held around this point and it will remain to be seen how many applicants qualify to buy at this level.

Resales

The resales (or alienation) clause has been amended to reflect the change from an 8 week nomination period to 4 weeks.  The reasoning is to prevent leaseholder from being “stuck” in the resale process and able to sell on the open market sooner.

Staircasing

The first major change to the lease is the introduction of 1% shares.  Traditional staircasing still exists in the “old” form however an additional Schedule has been introduced allowing owners to buy a 1% share each year for the first 15 years of ownership.  This right passes to new owners following a resale.  To minimise costs for the leaseholder the valuation is undertaken by the RP making

reference to the original valuation of the property and the HPI (House Prices Index).  Each party will also cover their own costs.  A memorandum will still be required to record each additional share and the corresponding decrease in the level of Specified Rent.

Repairs

The second major change relates to repairs.  Historically the Shared Ownership Lease has been a full repairing lease with all responsibility for repairs lying with the leaseholder. 

The new lease introduces an initial repair period which ends after 10 years or on final staircasing, whichever is first.  Costs are covered up to £500 in any year, any unspent amount from the previous year can roll over to the next.

Such repairs do not cover wear and tear, and anything covered by buildings insurance or the warranty. 

Transfer

The model house lease has always included a draft Transfer to be used on final staircasing (when the freehold title is transferred to the owner).  The new model requires this Transfer to specifically exclude the provisions of Section 121 Law of Property Act 1925 which brings this drafting in line with current lender requirements in relation to Estate Rent charges, such unacceptable rent charge provisions have caused lots of delays in recent years.  

Two tiers of Shared Ownership?

Whilst RP’s are able to use the new lease for all sales going forward there will be a considerable period where properties will be available for sale with both forms of lease (indefinitely if we include resales). 

RP’s will have to use the new lease on a plot sales which are grant funded under the 2021-2026 programme or in relation to section 106 units currently in planning. 

Ground Rents – the end is nigh

Its not often that legal updates can genuinely claim to be interesting, but in the case of the issue of ground rents, readers will be aware of the somewhat seismic shift in the leasehold landscape currently being played out.

The new news?

The Government has introduced the Leasehold Reform (Ground Rent) Bill (Bill) into the House of Lords.  The first reading took place on 12 May 2021 and the second reading is scheduled for 24 May 2021.  It could however be some time before the new Act is in force and effective.

The effect of the Bill is to confine ground rents on newly established long residential leases to one peppercorn per year – crucially meaning that they will cease to have any financial value.

Further, administration charges in relation to those peppercorn rents can no longer be charged.

Legal niceties…

The new rules will apply to leases of dwellings granted on or after commencement of the new Act (assuming it gets passed).  This would include a lease created by a variation of a lease that results in a deemed surrender and regrant – quite a common occurrence when managing properties within the social housing sector. 

The rules will not apply to leases granted where buyers and sellers entered into a legally binding contract in relation to the grant of the lease before commencement of the new Act.

Some leases will be excepted from the ground rent curb, including business leases, statutory lease extensions of houses and flats, community housing, and certain equity release financial products and  rent to buy arrangements.  Special rules also apply to shared ownership leases and certain leases that replace leases that were in place before the new Act coming into force.

A couple of key points and exceptions

Shared Ownership Leases – rent can be charged on the Landlord’s retained share (at any amount), but it cannot be charged on the whole.  This exception falls away on final staircasing (when the Landlord no longer owns/retains any share).

Informal lease extensions –  where parties agree to extend the term of an existing lease (a non-statutory or informal lease extension) this usually operates by way of Surrender and Re-grant of the existing lease.  The Bill allows an exception in these circumstances where the Landlord is permitted, in the new (re-granted) lease, to continue charging any Rent that appears in the original Lease that is being extended.

Have you been naughty?

A breach of the new rules is a civil offence with a financial penalty of between £500 and £5,000.  A new duty on trading standards authorities in England and Wales is to be introduced to ensure the new rules are adhered to.  Leaseholders will be able to recover unlawfully charged ground rents through the First-tier Tribunal.

Practicalities…

We don’t yet know when the Bill will commence, possibly this may not be until 2023/2024.   However, the provisions are worth considering when forward planning and it may be that in the meantime the changes start to become prevalent the market place in any event.  

Please contact us if you wish to discuss any particular aspect of the Bill in more detail.

Sarah Jarvis

sarahj@sharratts-london.co.uk

W: 01959 568017

M: 07901 332729

Section 106 Agreement consultations

The Department for Communities and Local Government (DCLG) has launched a consultation on proposals for speeding up the process of negotiating and completing section 106 agreements. In particular, the consultation will discuss:

  1. Whether a dispute resolution mechanism should be available where section 106 negotiations breach statutory or agreed timescales;
  2. Whether an automatic or deemed section 106 agreement after set timescales would be workable in practice;
  3. Which bodies or appointed persons should provide the dispute resolution service;
  4. Whether section 106 dispute resolution be available for all types of planning application;
  5. Whether any dispute mechanism should include the determination of the related planning application.

The consultation is also seeking views on whether the requirement to provide affordable housing contributions acts as a barrier to the provision of dedicated student accommodation. The government will consult further on any changes in relation to student accommodation should the responses to this consultation suggest that there is an issue.

The consultation applies to England only and closes on 19 March 2015.

Section 81 of the Coronavirus Act 2020 – Residential Tenancies

Section 81 of the Coronavirus Act 2020 – Residential Tenancies

As mentioned in our previous article the Government passed a special legislation, namely the Coronavirus Act 2020, in light of the Coronavirus outbreak. In this article we will talk about what measures have been introduced to help protect residential tenants in this difficult and uncertain time.

Section 81 of the Coronavirus Act 2020 has put in place special measures for residential tenants who find themselves unable to comply with the obligations imposed on them by their tenancy agreement.

Restrictions on the Termination of Tenancies

The Coronavirus Act 2020 stipulates that from the 26 March 2020 until 30 September 2020, Landlords must give all tenants three months’ notice if they intend to serve any notice seeking possession or notice to quit.

The temporary measures apply to the possession of tenancies governed by the Rent Act 1977, the Housing At 1985 and the Housing Act 1988. If Court proceedings are necessary, Landlords will be able to apply to the Court after the three months’ notice.

Please note the Secretary of State now has the power to extend this period by up to a further three months should it wishes to do so.

Landlords wishing to serve notice on tenants ought to be aware that the change in the legislation is also reflected in the prescribed forms of Notice. Form 3 and Form 6A, also known as Section 8 and Section 21 Notice’s respectively, have been changed.

Landlords must use the current forms (accessible via the Government’s website: www.gov.uk/guidance/assured-tenancy-forms) until 30 September 2020.

Rent

It should be noted that the special measures do not alter a tenant’s obligation to pay rent, but rather delay enforcement of the obligation through the threat of Court proceedings.

This means a tenant is still liable to pay their rent, however the Courts and the Government are urging cooperation from Landlords to accept late payment of rent from their tenants, over a period of time (i.e. over instalments), during these uncertain times.

If a Landlord relies on the rent to pay their Buy to Let mortgage, the Government has provided Landlords with some additional help in that they are protected by a 3 month mortgage payment holiday. As with rent the obligation is not written off, but merely suspended and interest will continue to accrue.

Suspension of Possession Proceedings

From 27 March 2020, the Courts have suspended all ongoing housing possession cases. This means that neither cases currently in or about to go into the system can be progressed.

The suspension of housing possession actions will initially last for 90 days and applies to all possession actions brought under CPR Part 55.

This means, all hearings which were listed to be heard until the end of June will be vacated. County Court bailiffs have also ceased enforcement of possession orders which are already in force for the time being.

Please note the Coronavirus Act does not apply to all tenancies, for example, it may not apply to some student lettings, holiday lets or tenancies at low rent. It is worth noting that this Act is not retrospective, and therefore it does not apply to any notices which were validly served before its commencement. They will remain valid for the purpose of issuing future court proceedings. However, If Court proceedings are necessary, Landlords will not be able to issue proceedings until after the suspension is lifted.

Summary

The Coronavirus Act does not prevent Landlords from serving notice on tenants. However, Landlords must give at least three months’ notice under the Act. If the tenant has not vacated the property within the three months’ notice period, Landlords cannot commence Court proceedings until after the suspension has been lifted.

Commercial Property – The Coronavirus Act 2020

Section 82 of The Coronavirus Act 2020 came into effect last month and has introduced some special measures to protect tenants of commercial premises who are experiencing interruption to their businesses as a result of forced closures, restrictions on trade and social distancing.  

http://www.legislation.gov.uk/ukpga/2020/7/part/1/crossheading/business-tenancies-protection-from-forfeiture-etc/enacted 

The Act has placed restrictions on landlords’ rights to forfeit leases of commercial premises, where a tenant has failed to pay the rent due under the lease, whether the decision for non-payment relates to COVID-19 or not.

The introduction of these special measures apply to all tenants and lawful occupiers of commercial premises (whatever sector they operate in), whether the tenant is permitted to open for business or faces any restrictions on trade, and regardless of the tenant’s financial standing and resources.

The restrictions placed on landlords are to remain in place until 30 June 2020, though this period may be extended by the Government.

Although the restrictions in placed are aimed to limit what action a landlord can take during this period, the landlord’s right to forfeit for non-payment of rent is reinstated after the restrictions are lifted should rents remain unpaid on or after 1 July 2020.

In the meantime, we will have to wait until 30 June 2020 to have a clearer picture on what the future holds.

Preserved Right to Buy discount cap changes

Preserved Right To Buy discount caps change as of 6 April 2020 – A Reminder

If you are dealing with Preserved Right to Buy matters then you are probably already aware that the maximum discount limits are revised and apply on 6 April every year in line with the Consumer Prices Index. The figures for the year from 6 April 2020 are: £84,200 for properties outside London and £112,300 for properties in London.

For new applications received from (and including) today you will need to be careful to amend your standard form offer notices to reflect this.

The change does not have retrospective affect so any applications received prior to this date should be on the basis of the old discount rates. Accordingly you may still need to send out offer notices (section 125 notices) with the old discount rates in these circumstances. Obviously, you will not need to re-issue any existing offer notices.

There has been no change to the discount figures for Right To Acquire disposals.

Please contact Paul Skleton to disucss further pauls@sharratts-london.co.uk or 01959 568029.

First Homes: What do we know so far?

The Government announced its intentions to roll out a new housing scheme to give the next generation of homeowners the opportunity to take their first step on to the property ladder.

The scheme, known as First Homes, will see a proportion of new homes be made available at a 30% market discount rate, with those eligible being able to buy direct from the developer.

However, properties built under the scheme will retain the discount it was purchased with, meaning that buyers wanting to sell will have to sell at the same 30% market discount rate.

This requirement has raised some questions about how buyers using the scheme will fare when trying to progress up the property ladder on the open market and how the discount will be maintained on future sales.

The Government has not yet given an exact figure of how many homes would be built under the First Homes Scheme, nor where the scheme will be trialled.

It is mooted that the Government will introduce the First Homes scheme via the planning system, and most likely via s106 Agreements. If the scheme is integrated into a s106 Agreement, developers will have to deliver a number of units on each new development as First Homes.

These First Home requirements may (and almost certainly will) replace, in whole or in part, the currently common requirements to transfer a proportion of the new homes on a development to a Registered Provider for shared ownership, intermediate or social/ affordable rent.

The housing charity Shelter has voiced their concerns that rather than creating a route to affordable homes, the scheme will simply put the social homes currently being built at risk.

A consultation has been launched to consider the new scheme, and will run until 3rd April https://www.gov.uk/government/consultations/first-homes. By then we should have a clearer picture on what the future holds.

Estate Rentcharges – The Issues

Estate Rentcharges – the hidden issues

The Rentcharges Act 1977 provided that all existing rentcharges are to be extinguished on 22 June 2037 and that no new rentcharges could be created.   The exception is an estate rentcharge.  

This article deals with current issues with estate rentcharges only and does not look at the other forms of rentcharge covered by the Rentcharges Act 1977.

The background 

Estate Rentcharges affect freehold properties and are occasionally used by developers.   

Estate rentcharges impose a charge on the land which can be enforced to secure the obligations (normally being the obligations to pay towards the upkeep and maintenance of private common areas of the Estate) and create obligations that are directly enforceable against any successors in title to the original purchaser without the need for the successor to enter into any direct agreement with the management company (or other owner of the rentcharge).  There is no scope or mechanism to challenge the amount of rentcharge due (other than to bring court proceedings).   

The current issues for homeowners and their lenders

Section 121 of the Law of Property Act 1925 (“LPA 1925”) implies two remedies which benefit the management company (or other owner of the rentcharge) unless they are expressly excluded.   These allow the rentcharge owner to take possession of a freehold house and lawfully exclude the owner from their house should the rentcharge monies remain unpaid for 40 days.  This causes great concern to lenders as this could make a property unsaleable which would mean that a lenders security, and ability to sell the property should the owner default on their mortgage, could be at risk.

The 2 remedies as set out in Section 121 LPA 1925 are set out below: 

  1. A right to enter into possession of and hold the property or any part thereof, and to take the income from the property (section 121(3) LPA 1925).
  2. A right to lease the property or any part thereof to a trustee (section 121(4) LPA 1925). 

This means that unlike forfeiture proceedings against a leaseholder following a breach of a lease there is no requirement for the rentcharge owner to serve any notice to the owner or any lender giving them a reasonable period of time to remedy the breach, nor is there a right for the owner to apply to the courts for relief and if the rentcharge does remain unpaid for 40 days, the rentcharge owner may take possession of the property or grant a lease of the property to a trustee which can be registered at the Land Registry, meaning the owner could be excluded from their property without any remedy other than to pay any outstanding rentcharge monies.  

Furthermore, the trustee can collect any income or mortgage sell or underlet the lease to raise the required funds to cover the amount owing and any additional costs incurred.  The lease will continue for the full term of years it has been granted for even if the rentcharge arrears are paid or the rentcharge is redeemed in full, unless surrendered by the rentcharge owner, which would not be done automatically and could be at the cost of an additional premium.  This was confirmed in the case of Roberts and others V  Lawton [2016].   

The right of re-entry and the granting of such a lease would be binding on any future purchasers together with any lenders in possession and therefore could significantly affect the value of the property and is therefore having an effect on the number of lenders willing to offer mortgages on properties which have these provisions included.

A compromise

When instructed by client’s acquiring a number of plots on a development that is subject to estate rentcharges one should always seek to limit or remove the remedies available to rentcharge owners pursuant to section 121 LPA entirely and to include wording that ensures that specifically both s121(3) and s121(4) LPA 1925 are excluded.

However where this is not possible or accepted by developers (generally because the form of transfer has been used on their private plot sales or on previous disposals) one should seek to include additional wording which would act as a compromise between the parties.

One compromise would be to include a provision that notice would required to be given, in particular to a lender etc., prior to any of the remedies under s121 being exercised.  This would allow lenders to remedy the breach and pay any rentcharges due without any risk to their security.

Another compromise would be to ensure that there is provision to provide that where the statutory remedy of the grant of a lease of the Property on trust as provided for in Section 121(4) LPA 1925 is exercised for non-payment of estate rentcharges the lease will be surrendered, without a premium, following the payment of all arrears together with legal costs and court costs of creating and surrendering the lease.  This would again give lenders the comfort that such a lease would not have a detrimental effect on their security and could be removed on payment of the outstanding monies.

Is reform afoot? 

The Government has promised legislative reform but since a consultation was opened in Autumn 2018 little progress has been made and the law remains unchanged.  Perhaps once the big “B” has occurred reform may be more forthcoming but the compromises set out above should assist in resisting the measures implied under section 121 LPA in the interim period.

Sharratts to Paris

A massive thank you to everyone who supported us in any way on our cycle ride from Brasted to Paris.  A special thanks goes to all of the 27 cyclists who cycled through at least three seasons of weather over the three days but remained cheerful throughout.

Three members of Team Sharratts have provided the following blog from the three days:

Thursday morning seemed to arrive from nowhere; cars pulled up in darkness into Sharratts unrecognisably quiet car park. Strangers with a common goal, with hidden shared anxieties and excitements silently unpacked their bags and bikes and prepared themselves for the three days to come.

With everyone ready we were told what to expect; 70 miles of both urban and country roads with hills a plenty. The rain wasn’t mentioned as a feature, but none the less it joined us anyway for almost the entirety of the day…. and we were off. Locals cheered support from cars as we left and headed down the A25, if they cheered to you personally you’ll likely remember what was said! 

17 Miles raced by and we were greeted in East Peckham for a welcome drink and snack. There were, at every stop, a tub of Jelly Babies.   Another welcome stop at the Bell and Jorrocks pub in Frittenden, that was 30 miles devoured and we pushed forward quickly to lunch.  The rain really hit in this window and by the time we arrived everyone was muddy, soaked and more than ready to warm up. The conditions clearly motivated the pack with riders arriving 45 mins before we were expected. The Tiger Inn was almost perfect, there was a roaring fire, a decent lunch and the best flapjack anyone could ask for. I think we all over ate, within a mile there were three of the highest grade hills of the tour; perhaps we should have saved that flapjack. Everyone climbed the hills at a pace suitable for them and raced into Dover.  The ferry was delayed, there was a Burger King at the terminal. We ate on the ferry, we should have eaten at Burger King… always eat at the Burger King. We arrived in Calais and saddled up for the final ride to the hotel. This was to be 5 miles, it was not five miles. The peloton disembarked the ferry and headed into the street lit French streets..5 miles passed, no hotel, 6 miles. No hotel..where is the hotel?!… There was a hotel.. Yes!! There was a hotel!!  I don’t think we’ve ever needed a shower and a rest more.

We were up before the sun on Friday ready to set off at first light.  Not long after leaving the hotel at 8am it was clear that Friday was going to be a tough day.  The wind was getting up and the rain was definitely on its way. 

The first 25 miles to the water stop were hilly to say the least and with the head wind it made that first stretch a tough one.  We refuelled at 25 miles and set off on the next stretch of 40 miles to get to our lunch destination.  That 40 miles was the hardest few hours of cycling we had all ever endured with ever the tour company saying they had never seen anything like it.  35mph winds and hard hitting driving rain meant that we couldn’t take in much scenery. A small town about 45 miles in was cobbled, which we are sure would have been lovely in the summer but wet cobbles and road bikes are not the best combination and a number of the team had a few cuts and bruises after slipping and sliding through the town.  This was followed by even harder rain (perhaps even hail) and a section of road where a local farmer had obviously been in and out of the fields with his tractor as about half a mile of the road was covered in mud and a number of us got to lunch looking a little worse for wear.  Just before lunch the sun did make an appearance and we were glad to get to the stop a little drier.  

Refuelled, we set off for the last 35 miles of the day with the wind still strong and the rain just about to come down on us again.  The rain meant that Friday was the day for the most punctures but everyone managed to fix them and get on their way quickly to avoid getting too cold standing in the rain.  We arrived in Amien just before 7pm all still smiling and looking forward to celebrating getting through a very tough 102 miles.  Needless to say it was not a late night and we were all apprehensive about what Saturday may throw at us.

We woke up on Saturday morning relieved to see that for the first time it was dry…unfortunately the wind was as present as ever.

Today we were on a tight schedule to get to Paris before it got dark, so we set off as soon as it started to get light.  The first 25 miles were relatively easy going, however after the first water stop the hills were back and the open fields provided no shelter from the 30 mph gusts of wind.

We had a welcome surprise water break after another 20 miles and we stopped long enough to eat another handful of jelly babies and get back on the road.  The next 25 miles was the best stretch of the whole experience with the pretty villages and old buildings providing plenty of shelter from the wind and allowing us to pick up some much needed speed. 

After a quick lunchbreak which consisted of the rawest burger I have ever been served we were back on the road for the final stretch which was good going until we reached the outskirts of Paris which was 15 miles of continuous stopping and starting for traffic lights.

We all regrouped at the entrance of Parc Monceau and cycled as a group the last 3 miles through Paris, round the Arc de Triomphe and down to the Eiffel Tower.  As we rounded the last corner a group of friends, family and colleagues were cheering us on which was amazing and topped off an already great experience.  We were all overjoyed and relieved to have made it….until we were informed we had to cycle another 5 miles back to our hotel!

Matt, Nicola and Kate

2nd October 2019

Ground Rent issues on property sales

The recent adverse publicity regarding ground rent is high on the agenda for Landlords (including developers) of new build flats and the effect that escalating ground rents within leases can have on both mortgage-ability and saleability of properties in the current market. 

We have set out below some background information on this complex issue.

Background

If ground rent in a lease is more than £250pa outside of London or £1000pa within London, in properties being occupied by a tenant as their only or principle home, current legislation means that any leases with a ground rent of above these limits could result in them being classed as an assured tenancy under the Housing Act 1988.   The issue has arisen as Leases have started to contain unfair ground rent escalation provisions such as doubling every 10/15 years over a term of 999 years.  This results in an extremely high ground rent which could affect the value and future marketability of the property.

The main issue

Ground 8 of the Housing Act 1988 allows a Landlord to apply to the court for an order to take possession of a property where the ground rent is 3 months in arrears, and as this is a mandatory ground for possession, the court cannot refuse such an order.   If the ground rent is very high there is more chance of a Tenant falling into arrears, allowing the Landlord to take possession.  In normal leases (i.e not shared ownership ones) there is no requirement for the Landlord in this situation to notify the mortgage lender that they are looking to take possession and as this is a mandatory ground and the court cannot refuse to grant an order for possession, a lender could end up losing their security without even knowing about it, by which point it would be too late for them to pay the arrears. 

To recap, leases which have ground rent above £1000 in London or £250 outside of London are currently classed as an “assured tenancy” under the Housing Act 1988. This means that the Landlord can seek to end the lease by an order of the court, and attempt to evict the Tenant if there is ground rent more than 3 months in arrears.  The Government is considering amending the Housing Act 1988 to exempt leaseholders from legislation that was intended to ensure that rack rent tenants in the private rented sector do not build up rent arrears.   Ground 8 is particularly relevant as it covers mandatory grounds for possession for an assured tenancy and concerns arrears of rent.  The mandatory nature of Ground 8 means a judge cannot refuse to make the order.   So effectively if any Tenants were more than 3 months behind in their rent, a Landlord could apply to the court for a possession order to evict the Tenant and this would automatically be granted.  

Ground 8 and the implications that it can cause on lenders security is the reason that most lenders now have guidance on the levels and future increases of ground rent that they will accept.

 What has been the response of lenders?

 A lot of lenders have now adopted the following:

  • the maximum ground rent at the start of the lease term must not exceed £1000 a year;
  • the ground rent must not be capable of being increased during the first 21 years of the lease, and not more frequently than every 21 years during the rest of the lease term;
  • when the ground rent is reviewed, any increase must not exceed the higher of 100% of the ground rent payable immediately before the date of the rent review: ii) a figure increased in accordance with the equivalent percentage change in the Index of Retail Prices since the date of the previous rent review.
  • With a number of lenders specifically also saying they will not accept ground rent provisions that contain unreasonable multipliers (i.e. doubling every 5, 10 or 15 years)

How this affects Landlords on a day to day basis

Until there is a legislative change buyer’s solicitors must generally report the ground provisions to the lenders and ensure that the provisions are in line with any guidance that the relevant lender has issued and if they have concerns to take out indemnity insurance or seek to amend the lease.  In shared ownership leases, this doesn’t matter as much at the beginning as the lease contains the mortgagee protection clause, but if the ground rent continues to be charged following final Staircasing, then whilst it may not be an immediate issue, it could cause problems on final Staircasing if the tenant needed to re-mortgage to final staircase, as if the level of ground rent became excessive and affected marketability the tenant could have difficulty in obtaining mortgage finance or indeed selling the property on in the future.  This is therefore something that buyers solicitors are raising as an issue from the outset of transactions.

The way forward

They government is now looking to change the Housing Act 1988 legislation so that long leases are not caught by it, as the original intention of this legislation was not to catch long leases.  They opened a consultation in July 2017 which looked at the “unfair and abusive practices within the leasehold system” and published the results in December 2017 which confirmed that they would look to introduce the following measures:

  • legislating to prevent the sale of new build leasehold houses except where necessary such as shared ownership
  • making certain that ground rents on new long leases – for both houses and flats – are set at zero
  • working with the Law Commission to support existing leaseholders and make the process of purchasing a freehold or extending a lease much easier, faster and cheaper
  • providing leaseholders with clear support on the various routes to redress available to them
  • a wider internal review of the support and advice to leaseholders to make sure it is fit for purpose in this new legislative and regulatory environment
  • making sure freeholders have equivalent rights to leaseholders to challenge unfair service charges

How long this legislation will take to change though is not known at this stage and given the complexities involved it is thought it could take some time to come forward.

What can be done in the interim?

While we wait for legislation to change there are a number of ways that Landlords can ensure that the ground rent provisions within leases are acceptable to both Tenants and their mortgage lenders including:

  • Starting ground rents to be below the current AST thresholds (i.e. £250 outside of London and £1000 inside of London);
  • Capping ground rent increases at the above levels;
  • Ensure that any escalation provisions only provide for increases in line with RPI; and
  • Including provisions within the lease to deal with serving notice on any mortgagee before commencing possession proceedings

Whilst the above measures may not bring in the desired income from ground rents that it used to – Landlords should consider whether changing their ground rent policies to be in line with the government’s proposals, and in line with current CML requirements, therefore allowing properties to be occupied, outweighs the risk of properties being un-mortgageable and therefore unsaleable.

Kate Anderson 

01959 568034 or katea@sharratts-london.co.uk         

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