Legal Brief

By Daniel Fireman, FIBA Executive Committee member and Head of Real Estate Finance at Howard Kennedy LLP

Members should take note of proposed changes to tackle unfair practices in the leasehold market, which, when implemented, will need to be taken in account when assessing the suitability of proposed leasehold property as security.

In particular, the Government has indicated that it intends to:

• Prohibit new residential long leases of new houses or of existing freehold houses
• Facilitate (and presumably simplify) the enfranchisement/lease extension process and consider a prescribed formula for compensation which should reduce the cost without being unfair to landlords
• Discourage developers from promoting help-to-buy equity loans for purchase of leasehold houses in advance of legislation
• Ensure that, in future, ground rents on new long leases of houses and flats are set at a peppercorn
• Consider how it can help existing leaseholders with onerous ground rents - it wants developers to introduce schemes to compensate individuals including second hand buyers
• Provide a right of first refusal for leasehold houses
• Amend the Housing Act 1988 to ensure long leaseholders paying a ground rent of more than £1000 in Greater London or £250 elsewhere in England are not subject to an assured shorthold tenancy and to a mandatory possession order for ground rent arrears
• Give freeholders the right to challenge service charge in the same way as leaseholders
• Ensure, where the freeholder pays a rent charge, that the rent charge owner is not able to take possession or grant a lease on the property where the rent charge remains unpaid for a short period of time
• Professionalise managing agents
• Introduce a minimum lease term for new long leases of flats
• Reinvigorate commonhold and persuade lenders to change their criteria relating to it

To a large extent, any such changes to existing legislation will be welcomed, as investors, buyers and indeed lenders can get some certainty. But intermediaries will need to consider and forewarn borrowers of the impact that the likelihood of these changes being implemented and their implementation might have on lending criteria so that borrowers can consider arranging their holdings in a manner that accommodates them.