Will The Recent 14-Point Pledge End Onerous Leasehold Terms?

Written by Beth Rudolf, Director of Delivery at the Conveyancing Association

On the face of it, we recently had a very positive step forward in terms of helping existing leaseholders, with the announcement by Housing Minister, James Brokenshire, that 40 house builders/developers had signed up to a 14-point pledge designed to ‘end the practice of unfair and onerous leaseholds’.

Amongst those signed up are some of the industry’s biggest names plus the Home Building Federation, and sitting right at the heart of these ‘pledges’ is a commitment to change the ‘doubling clauses’ on ground rents, away from its current incarnation to one based on RPI increases. As mentioned, ‘on the face of it’ this appears to be a move which should benefit the 12,000 or so existing leaseholders trapped in such a position, especially as this move would be changed for all rather than just those who had just requested an amendment.

But – and I’m sure you’ve already seen some of the negative reaction this announcement has engendered – all is not as it seems, especially when you look at what RPI could potentially rise to. For instance, history is littered with occurrences where RPI rocketed – anyone remember the UK pulling out of the ERM – up to 25%, and it can also range quite widely even in what we might describe as ‘normal circumstances’.

In those cases, if RPI was to rise significantly, we’d have a situation where developers and signatories would be getting a much better deal on ground rent than the one they already have. A number of leaseholders have already told us that the deal on offer is to increase by RPI for the term of the lease every 20 years, but the current deals were only for four rounds of doubling over 20 years. Of course it would depend on how RPI moves, but we surely can’t have a situation where leaseholders could end up paying more under this change than they would have previously?

This also of course doesn’t remove the spectre of the Housing Act provisions which would turn a long lease into an assured tenancy when the rent goes over £250 per year (£1k pa in London). It seems that the obvious solution for a Government which has already stated it wants ground rent to be a peppercorn, but who are struggling against the potential for expensive compensation claims, would be to cap ground rent a pound below the Housing Act threshold. This would give existing freeholders a valuable return, could be increased if there is a genuine need through increasing the Housing Act threshold and would be affordable to most leaseholders.

What is just as important though is that a leasehold buyer should be fully aware of the financial impact of the lease terms prior to putting in an offer. We have made representations to the Ministry that the pledges should reflect the legal position under the Consumer Protection from Unfair Trading Regulations (CPRs). Currently the pledges say that a buyer will be made aware prior to signing the lease but of course that might be after exchange of contracts and will definitely be after putting in their offer.

We know from Government and PropertyMark leaseholder surveys that a significant number of leaseholders wish they had never bought leasehold and we put that down to the more than 95% of leaseholders in our own survey who said they had not received any information on the terms of the lease prior to putting in their offer. Let’s not forget that legal advisers cannot advise buyers until they are:

  1. Instructed by a buyer.
  2. Provided with the information necessary to advise them.

Even where a conveyancer has advised a buyer, the pressure on the buyer to exchange is so great if they are going to secure the property and their Help To Buy funding. Are buyers really in a position to turn around and say I am willing to risk the reservation deposit because I have now found out that my rent doubles every 20 years and I have to pay permission fees of £5k if I decide I want a conservatory in the future? Again, it could be a case of the horse having bolted long before the legal adviser is able to close that particular stable door.

For this reason, we at the CA would like to see more in this ‘pledge document’ about making the information available prior to offer and a full menu of the administration fees charged provided and restricted to reasonable levels. All the information provided to the buyer prior to offer should also be provided to their legal adviser so they can confirm that it is reflected in the contract and lease. This is all about transparency and ensuring potential leaseholders are in full possession of the facts around what they’re purchasing and the ongoing costs of that in the future.

As an addendum, a more interesting report was recently published by Agilesphere on ‘event fees’ – it makes a variety of recommendations specifically for retirement homes but it’s our belief they should be adopted for all homes where you have to pay a fee whether that be leaseholds, managed freeholds with service charges or freeholds with consent required under a restriction.

The recommendations include calls to:

  • Standardise the language – so that the buyer can compare apples with apples.
  • Present fee details in a common format – ensure the information on administration and event fees applicable to a property is made available at the earliest possible stage in adverts and marketing material.
  • A centrally-administered data store of fees and beneficiaries – creating a dataset of information on fees which must be updated by the freeholder.
  • Enforcement to monitor compliance of providers – use National Trading Standard’s Estate Agency Team to monitor the 300 new plots which go on to the market each week to ensure that they are compliant.

Again, it’s all about ensuring you have the full facts before the individual makes such a large investment – what is likely to be the biggest financial commitment of most people’s lives. It’s for this reason that we, at the CA, will continue to push and lobby for these types of changes, to create a positive home moving experience for all.

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