From and article I wrote for ‘Mortgage Finance Gazette’ May 2020
The law which governs our current leasehold system was once described as “the mad Victorian aunt locked in the attic of the great house. Occasionally seen, sometimes talked about, often making a noise in the background and largely incoherent”.
A few years ago, a leasehold scandal broke which changed all that and brought leasehold kicking and screaming to the attention of the media and politicians. Newly built houses, which were mainly sold using the government’s Help to Buy scheme, were routinely and needlessly being sold on a leasehold basis. To make matters worse it was discovered that many of these houses had onerously high ground rents and clauses in the leases which allowed eye watering fees to be demanded for various licences and permissions by the freeholders.
A small and rightfully aggrieved army of leaseholders became furious and very vocal leasehold activists and the topic of leasehold went from being “occasionally seen, sometimes talked about” to becoming the hot media topic and being incessantly spoken about. Leasehold practitioners whose previous claim to fame was to have been regularly voted as ‘the worst people you could possibly get talking to at a party’ found themselves thrust under the media spotlight. This wasn’t a flash in the pan outrage though; in fact, it gathered pace and became an important political issue.
This prompted the government to firstly investigate the claims of the abuses and then solemnly promise to reform this leasehold system once and for all. In September 2017, then Communities Secretary Sajid Javid promised an end to the “feudal practice” and called for new rules to make extending a lease or purchasing a freehold “much easier, faster and cheaper”. The Government subsequently asked the Law Commission to look at the subject of leasehold reform as part of its 13th Programme of Law Reform.
The media storm and political interest in leasehold that ensued has undoubtably changed the way leasehold properties are viewed across all aspects of society, from homeowners to mortgage lenders, politicians to housing developers. In these unparalleled times we might now ask, what is the future for the leasehold system?
For the past three years the government has repeatedly promised to immediately enact legislation to ensure that new houses will no longer be sold as leasehold (except in the rare cases of land ownership which had existing restrictive covenants, such as with properties owned by the National Trust or Crown Estate). They also gave a commitment that all new build properties could only be sold with a peppercorn (i.e. zero) ground rent and should have very long leases of several hundreds of years.
To date, legislation has not been changed to incorporate the government’s commitments. Regardless of this dearth of legislative change, the leasehold property market and how lenders, investors and housing developers view it has changed significantly, in large part due to the threat of reform hanging over the sector like the Sword of Damocles.
Take, for example, ground rents and their implications for property values which had previously been largely ignored by lenders save in the most extreme cases. The leasehold scandal has changed this. Rather helpfully, or perhaps unhelpfully depending on your own point of view, the definition of what constitutes an onerous ground rent has been universally accepted. A ground rent which is now more than 0.01% of the capital value of the property or rises above 0.01% in the lifetime of the lease, is an onerous ground rent. There exists already a plethora of evidence that lenders have taken this seriously and are reluctant to lend on affected leasehold properties, which has implications for homebuyers and sellers alike.
We are also required to look at the ground rent accelerators contained in the lease, as such accelerators could raise ground rent above 0.01% over the lifetime of the lease. Broadly this means that ground rents that periodically rise with reference to the Retail Price Index or the Consumer Price Index are acceptable as long as the base ground rent is modest. However, it may be more difficult to secure a mortgage on properties where the ground rent doubles every five, ten, fifteen and sometimes twenty-five years.
It also became clear that a property with a ground rent of more than £1,000 a year in London or over £250 per annum in the rest of the country fall into a definition bracket of being ‘ASTs’ (Assured Shorthold Tenancy) for certain complex aspects of their leasehold obligations. The most serious consequence of this being that the courts do not have the jurisdiction to grant relief from forfeiture in certain cases. None of us saw that one coming!
The length of the lease remaining on a property has also become an important factor in whether a leasehold property is mortgageable or not. When I entered the industry eleven years ago, common wisdom dictated that you could easily get a mortgage on a leasehold property with a lease length of 75 or even 70 years remaining. It is now a regular occurrence to see a lender insist that a lease extension is carried out on properties with leases of 85 or even 87 years remaining before the granting of a mortgage.
The biggest change in the leasehold market though has been the change in the attitude of potential buyers of these properties. Leaseholders have become much better educated on leasehold matters and are increasingly reluctant to enter into a form of land tenure which is ‘largely incoherent’. It seems that they don’t want to buy properties with ground rent or lease length issues, nor do they want to face issues with service charges or bills for major works either (the latter has been thrown into sharp focus following the Grenfell Tower fire tragedy in June 2017, which has seen leaseholders of flats with suspected combustible cladding facing huge bills for remediation works).
More and more statistics are being released that show that leasehold flats with a share of freehold are being sold at a healthy premium compared to leasehold properties, even ones with long leases. It will be interesting to see how this develops in the coming months and years. Have leasehold properties ever been so unpopular?
One thing that’s certain is that lenders and estate agents will have to change their approach to leasehold properties. Part of the focus of leasehold reform campaigners is to force estate agents to display comprehensive and accurate data on the leasehold properties that they are selling. They want to see the correct lease length displayed, what the ground rent is, the nature of the ground rent accelerator dictated by the lease as well as information on the service charges and any planned major works. It seems entirely reasonable that buyers should be provided with transparent and comprehensive information about the property they are interested in before committing to a purchase, and it is staggering that this is not already considered best practice by the industry or compelled by law.
It is rather worrying that no one seems to know just how many leasehold properties there are in England and Wales but by our reckoning the real figure is around six million properties. That is just shy of 25% of the total housing market. Of this total we believe that the leases on around 26.5% of these properties have already fallen below the critical 80-year mark. With everything else that is currently going on in the world and the unprecedented closure of the property market, this may make depressing reading for estate agents and lenders. However, it may also be a great opportunity for those willing to specialise in the leasehold market and become expert market leaders in the field.
What of all the talk of government reform to the ‘mad Victorian aunt’ of leasehold, does it seem likely?
It is my personal belief that the government was genuine in its desire to reform the leasehold system. The initially ambitious plans and welcome rhetoric were subsequently thwarted by the Brexit crisis (remember that?). It was immediately apparent that all the available parliamentary time would be burned through by the Brexit drama that was playing out. This has now been trumped by the shocking and wholly unforeseeable effects the Covid-19 crisis has had on the world’s economy. Property transactions too have largely dried up, as viewings, conveyancing, surveys and leasehold consultations all require a certain amount of face-to-face interaction and access to properties, which the current pandemic and lockdown has simply made impossible.
Are we about to enter the biggest recession the world has ever seen or experience a shallow ‘V’ shape recovery? The truth is that none of us knows the answer to this for certain. The one thing we can say with some certainty is that once lockdown has ended there will be fewer people in a financial position to buy properties.
Even if we don’t experience a full-scale recession, we will see the market officially move to become a ‘buyer’s market’ if it isn’t already. This will only exacerbate the issues of leasehold properties and the public’s perception of them. Buyers will be in a position to insist leases are extended and onerous ground rents are expunged before they agree to purchase the property.
The unfavourable position existing leaseholders find themselves in, coupled with the increasingly unfavourable sentiment shown toward their properties, may galvanise leaseholders into forming groups and forcing their freeholders to sell them the freehold of their buildings in increasing numbers. This is a legal right leaseholders have had since the Leasehold Reform Act 1967 introduced the right to enfranchise. However, lenders seem to take a dim view of flats where the management of the blocks is governed by the leaseholders themselves. This is certainly one to watch with interest in the coming months.
Undoubtably the mad Victorian aunt that is leasehold has escaped the attic and she is not going back any time soon. Leasehold has become a significant issue in our property market, one that can no longer be ignored. It has created serious problems for a meaningful number of properties and those problems will almost certainly increase in the coming months. Most of us that work in and have experience of the leasehold system can attest to the fact that leasehold is still, ‘largely incoherent’ with some enthusiasm!
The genie of leasehold reform is out of the bottle and vociferous groups of leaseholders will not lie down without a fight. Whatever legislative changes are eventually enacted by government, it will be for those working in the sector to understand the changes and their implications, and to advise their clients accordingly. It shouldn’t be ignored though that leasehold issues still presents an opportunity for lenders and practitioners prepared to move into the leasehold sector and specialise in it. Leaseholders now demand it!