Fixing the broken housing market – where are we now?

Abolishing the grant of leases of houses and banning letting agents’ fees

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In February this year, the Government published its Housing White Paper which was entitled “Fixing our Broken Housing Market”.  Before it was released the then Housing Minister, Gavin Barwell spoke at the Lease conference and hinted that major reform to leasehold law could be in the wings.  As it transpired, however, the White Paper was something of a damp squib.  Although it heralded further reforms to improve consumer choice and fairness in leasehold, so far not much has happened.  Two issues on which reform has been promised, however, are escalating ground rents and tenancy fees.

Escalating Ground Rents

There were an estimated 4 million residential leasehold dwellings in the England in the private sector in 2014/15 and 1.2 million of these were leasehold houses according to the Department for Communities and Local Government. In recent times, there has been a trend for developers of houses to sell them on long leases rather than as a freehold.   As every good property practitioner knows, the leasehold structure is a legal device to govern mutual rights and obligations in a multi-occupancy building.  It is not generally necessary to use the leasehold structure for houses because they are independent buildings which can be managed without recourse to others.

By granting leases of houses at a rent, developers retain the freehold which is a saleable asset.  Traditionally the ground rent would be a nominal sum each year or even a peppercorn. However, many of the ground rents for new builds are now structured so that they escalate at an alarming rate, for example, doubling every ten years. This, increases the value of the freehold but decreases the value of the leasehold interest.  Not only do leaseholders have the added expense of paying their ground rent but the cost of enfranchising can become prohibitive.  In addition, with a lease in place the landlord can extract further fees from the tenant if he wishes to carry out alterations.   The Council of Mortgage Lenders requires conveyancing solicitors to consider and, if necessary report to the mortgagee any unpalatable rent increases.   Nationwide, for example, will not lend on a property with a doubling ground rent.

The Queen’s speech promised that the Government would consult and look to take action to promote transparency and fairness for leaseholders.  In particular, it would look at the sale of leasehold houses and onerous ground rents.   Since then the Government has proposed a complete ban on new houses being sold as leaseholds and consultation is underway.  In anticipation of this a number of large developers including Taylor Wimpey have set up funds to compensate leaseholders of houses.  

Much of the press coverage of this proposal has raised the question of what happens about existing house leases?  Shouldn’t they be abolished too?   Old leases of houses (often granted by landed estates) can also include onerous ground rents as illustrated in the recent decision of Clarise Properties Ltd v Rees [2017] EWCA Civ 1135 where the rent was to be reviewed to a “the open market letting value of the land”.

This is a much more difficult question because the leaseholder will have purchased the lease at a price based on the fact that the house was leasehold rather than freehold.  The lease may have had only 20 years left to run and the price will have reflected this.   It would be a breach of the Human Rights Act 1998 to allow for the acquisition of a freehold interest without payment of proper compensation to the landlord.  Compulsory purchase of the freehold of a leasehold house is, of course, already an option under the Leasehold Reform Act 1967 provided proper compensation is paid.  In relation to existing leasehold houses, therefore, the Government’s energies should probably be directed at simplifying the existing rights available to leaseholders.

Letting agents’ fees

It was also announced that a new Tenants’ Fees Bill will be published later this year to ban letting agents from charging fees to tenants.   According to Government figures, the average amount paid in fees by tenants is £223 but the housing charity Shelter has found that one in seven renters pay more that £500.  The aim of the Bill will be to increase competition in the private rental sector, resulting in lower costs and a higher quality of services for renters and to reduce the upfront costs for tenants.

The consultation period in relation to the proposed bill closed on 2nd June 2017 but no draft bill has yet been produced.  However, the proposals in outline are:

  1. to ban landlords and agents from requiring tenants to make any payments as a condition of their tenancy with the exception of the rent, a capped refundable security deposit, a capped refundable holding deposit and tenant default fees.
  2. to cap holding deposits at no more than one week’s rent and security deposits at no more than one month’s rent.
  3. to introduce measures to enforce the ban with provision for tenants to be able to recover unlawfully charged fees.

Unsurprisingly, the proposals have been met by an outcry from letting agents who claim that many of them will be put out of business.    As letting agents are unlikely to want to provide their services for free, the burden of paying their fees will, in reality, shift from the tenant to the landlord.  As landlords are usually letting their property in order to make money, presumably they will simply re-coup the fees from an increased rent. 

Perhaps in order to counter this difficulty, it is proposed that the whole process should be made more transparent, as currently renters are charged varying amounts.  However, if they are not to be charged anything for letting fees, presumably this problem goes away.  In any event, letting agents are already legally required to publish their rates.

It will be interesting to see what, if any, reforms are forthcoming.

This article first appeared in the Estates Gazette, here.