Leasehold Changes: How Could They Affect Developers?

New governmental changes may affect property developers who rely on payments from leases. Stephen Brown, Senior Associate Solicitor – Commercial Property, discusses the implications for developers.

The government released the Housing White Paper on February 7th 2018, which set out its priorities for housing and how they can help increase its supply. This can be done by building homes faster, planning for the right homes in right places, diversifying the market and helping people now. This means big changes for developers who currently rely on payments from leases.

There are over 4 million residential leasehold dwellings in England alone, 1.4 million of which are leasehold houses and these new changes, if implemented, will prevent this number  growing by stopping the sale of new build leaseholds unless completely necessary.

Understanding the Legislation 

The package of leasehold reform measures, which follow a recent government consultation, also includes plans to make it cheaper and easier for existing leaseholders to purchase the freehold on their property. The government is also proposing to take action to ensure that leasehold property cannot be classed as an 'assured tenancy' just because the ground rent had increased above a certain threshold, which some lenders will not now lend on.

The ban on new leasehold houses will require primary legislation, which the government intends to back-date. It will prevent developers from avoiding the ban on new leasehold houses by taking new leases of development sites themselves after 21 December 2017, the date that the consultation response was published. However, whether this will go further and ban the sale of leasehold houses altogether after 21 December 2017, subject to limited exemptions, is not entirely clear. 

It should become easier and cheaper for leaseholders to buy-out their freehold and further changes (in England only) will include ground rents on new long leases for houses and flats being set to zero.

“Cut out Unfair and Abusive Practices”

The Communities Secretary, Sajid Javid has announced a ban on leaseholds for most new build houses to deliver a fairer and more transparent system for homeowners. The intention is to ‘cut out unfair and abusive practices within the leasehold system’. His and the Government’s view is that it is unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms.

What is clear is that sharp practice has been prevalent and this is a very popular policy decision with consumers – delivering real action on what has been seen as feudal practices.

Financial impacts for developers

The changes will have knock on impacts to lenders. Not only will their clients (the developer) receive less income from annual ground rent fees to service the loan, but the changes could restrict lending as many lenders will factor in the value of the freehold when calculating the overall Gross Developed Value (GDV) of a development site. This allows them to lend more whilst remaining within their covenants.

While the announcement is great news to homeowners, there are multiple drawbacks for developers.

Previously, builders could also sell the freehold to investors in order to cover the cost of rising building fees and land values, without having to pass the extra costs on to prospective homebuyers. This may no longer be possible.

Overall, these changes could create a two-tier housing market which would make new-build freehold houses more attractive than similar existing leasehold properties.

The government intends to work with the Law Commission to make it easier for developers to create legally binding arrangements allowing for the maintenance of shared structures, facilities and open spaces on freehold developments.

It will also legislate to ensure that freeholders who pay charges for the maintenance of communal areas and facilities on a private or mixed use estate can access similar rights to challenge the reasonableness of service charges as leaseholders.

More clarity needed

The government may not include an exemption to the ban on new leasehold houses where there is a need to set up an estates service charge to pay for the maintenance of open spaces, play areas, community buildings and communal facilities associated with new housing developments.

If that is the case, developers would have to rely on the other alternative structures. These are not as straightforward to implement and do not offer the same level of protection to both homeowners and developers. They can also be more costly to put in place at the outset, and to administer on future sales.

Currently, the position for developers on shared services is not entirely clear – the Government announcement suggested there may be an exemption for houses that have shared services. Developers will need clarification on this point quickly given the potential retrospective effect of the legislation, so it is hoped that the government will publish the draft legislation soon.

For more guidance on what this could mean for your potential development or land opportunity. contact Stephen at the Chichester office on 01243 787899 or email him at sb@andersonrowntree.co.uk