Blog service

Blog: Lease Reform – A Lender’s Perspective

All this activity in parliament has been sparked by a number of well-publicized scandals involving property buyers, often relatively unsophisticated first-time buyers, who have found themselves leasing rather than full ownership with onerous provisions in the home. their leases.

Some of the leases deemed to have had oppressive provisions included those with ground rents that doubled or so every ten years or increased based on an inflation index. Freighters may require large payments to approve changes or extensions. Leaseholders may have to insure the property through the freeholder’s agency and pay various fees and charges when the leasehold has been sold.

Buyers struggling with these unfair leases have found them to be difficult to sell, and mortgage lenders with loans secured on these leases have found their security compromised.

The first part of this legislative process is the Land Rent Reform Bill which will end ground rents for all new qualifying long term residential leases in England and Wales. At the time of writing, this bill is currently under consideration in the House of Lords and is expected to be sent back to the Commons for final approval fairly soon.

The Department of Housing, Communities and Local Government (MHCLG) estimates that the proportion of new built homes for rent has increased from around 7% in 1995 to 15% in 2016, but the latest reports suggest that it has now fallen. at about 1%. home builders have already realized that new leasehold construction is no longer likely to be profitable. In most situations, there is no logical reason why a home should be leased and buyers should always insist on freehold ownership.

Passing legislation to deal with new leases is probably the easiest part of this process, although not without controversy. For example, property owners of apartment buildings will say that without any rental income on the ground, they will have little incentive to incur the very significant costs and hassle associated with collecting rental charges and managing the building.

The second part of the process will include additional legislation to improve the situation for existing tenants, many of whom are struggling with onerous leases. MHCLG data shows that there are around 4.6 million rental properties in England, of which 68% are apartments and 32% are houses. Apartments in England are almost always sold on a lease basis (although the landlord may also own a freehold share) as a lease agreement is required under English law to ensure that agreements between occupants of the block can be applied.

The situation in Scotland is quite different. Apartments in Scotland are sold on the Scottish equivalent of freehold ownership and Scottish law provides for the mutual application of restrictive covenants.

Information from the MHCLG indicates that only around 8% of houses in England are leased, with the overwhelming majority sold freehold, but the proportion of rental housing is much higher in the North West, at around 28% . Most complaints about unfair leases on new subdivisions come from the Northwest, so this is a regional issue with local MPs being pressured by their aggrieved constituents to do something.

Surveyors who undertake leasehold appraisals for mortgage lenders are very familiar with all of these issues and their impact on appraisals. A leasehold property is an asset that depreciates and its value is reduced to nothing at the end of the lease when the property reverts to the free owner. This depreciation can be masked for some time by general house price inflation, but once the lease is less than 80 years old, the effect on the mortgage is significant.

Tenants facing a reduced lease term then have to purchase a lease extension from the independent landlord and at this point the independent landlord can request a substantial premium and an increase in the ground rent. Because the freehold has the upper hand in these situations – especially if the tenant is trying to sell the property – Parliament has intervened in a process that began with the Leasehold Reform Act 1967 and now continues with the second stage of the current process. .

The proposals for the second stage of the current process are that tenants should be able to extend their leases up to 900 years, which would effectively exclude any need to extend leases in the future with ground rents set at a grain of pepper and with the price of the lease extension determined by certain formulas yet to be confirmed. Steps will also be taken to deal with other unfair lease clauses.

Peter Glover is a surveyor and author of Building Surveys and Buying a House or Flat