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William Nassau-Lake
William Nassau-Lake,
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Sale of New Homes - Clamp Down on Punitive Lease Terms
15 May 2017

There has been much public debate recently concerning the imposition of punitive lease terms contained within leases of new homes. These terms are often added to enhance the residual investment value for the benefit of the developer but steps are being taken to clamp down on unfair practices.

There has also been growing criticism of the sale of newly built houses by way of lease (rather than a freehold sale) which has become more popular over recent years.

There has been particular criticism of the inclusion of the following terms within leases of new homes: 

  1. The imposition of ground rents which are disproportionately high when compared to the value of the unit.

  2. The inclusion of rent reviews on terms which result in excessive increases.

  3. The grant of leases for relatively short terms which result in a renewal process occurring sooner than necessary.

  4. The requirement for home owners to pay additional administration/management fees in certain circumstances such as on the sale or mortgage of the unit or when landlord’s consent is needed to undertake alterations.

Sajid Javid, Secretary of State for Communities and Local Government, has been particularly vocal on the matter and has been reported as describing the practices as “unjustifiable and unfair” and as a “feudal” rip-off and has vowed to protect home buyers from these terms. In February 2017 Gavin Barwell, the Housing Minister, also criticised the sale of leasehold houses and the imposition of excessive grounds rents and indicated that the Government would act to “stamp out” these practices.

One national house builder has also been subject to widespread public criticism for alleged inclusion of punitive ground rent review provisions which could lead to ground rents increasing to many thousands of pounds within 50 years from the grant of the lease. The house builder in question has reportedly set aside £100m+ to alter the terms of its leases and has also suffered unwanted negative press coverage.

It is not clear whether central Government has the appetite to impose additional legislation to address these practices on an industry that is crucial to the country’s economic prosperity and which is at the centre of the current Government’s well publicised pledges to address the housing crisis. That said, there has been recent indirect activity which may give an indication of things to come.

Early in May 2017, Nationwide Building Society elected to cease lending on the purchase of new homes with punitive lease terms. It has reported that with effect from 11 May 2017 it will no longer provide funding for the purchase of new leasehold homes (freehold or leasehold) where:

  1. The initial ground rent exceeds 0.1% of the unit value; or

  2. Where the lease is granted for a term of less than 125 years (for flats) or 250 years (for houses).

The Nationwide now also calls for conveyancers to seek express authority to proceed where the leases contain potentially onerous ground rent review mechanisms.

Sajid Javid has also indicated that he intends to prevent Help to Buy equity loans from being used to fund purchases of new homes subject to unfair lease terms.

It will not be surprising to see other lenders follow Nationwide’s lead. Should this occur, it is possible that the Council of Mortgage Lenders (CML) could be tempted to formalise this clamp down by introducing new minimum requirements on leasehold disposals of new homes within its legal handbook.

A change to the CML Handbook would immediately result in leases containing unacceptable terms becoming less attractive to purchasers but also potentially unmortgagable.

This could have serious implications for sales which have been exchanged “off-plan”, many months or even years before the new homes have been built and ready for legal completion and could result in buyers of those homes being unable to find mortgage finance. House builders may choose to voluntarily amend the offending lease terms in such cases to avoid adverse publicity and to prevent loss of sales but others may try to charge buyers a fee in order to modify the lease.

Maximising residual freehold investment values can be an important source of additional revenue to house builders but they should be aware of the current scrutiny in this area. House builders should give careful consideration to the potential impact on plot disposals before finalising lease terms for the sale of new homes.

House builders should assess whether they modify their lease structures now, in anticipation of a wider adoption of the approach taken by Nationwide, or elect to defer this process dependent upon the reaction of the mortgage markets in the months ahead.

At present, we are not aware of proposals by the Government or mortgage lenders to seek modification to leases which have already been granted or to restrict funding on transactions involving existing leases.

Please contact William Nassau-Lake or Derek Ching partners within Boyes Turner’s Development & House Building Team should you require assistance with the sale of new homes or site acquisitions.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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