Are you considering buying a new-build property in the near future? Be aware of potential changes.
At the end of last month the Communities Secretary, Sajid Javid, announced an 8 week consultation period to consider proposals to potentially prohibit the sale of new-build homes on a long leasehold basis.
Currently a high profile and widely discussed point in the building industry, it will be interesting to see the outcome of the consultation process, due to close mid next month. In the meantime we look to briefly examine the current position and give a few thoughts to the potential impact of any changes.
Property is commonly sold one of two ways, namely by way of freehold or long leasehold. When you acquire a freehold you have outright ownership of the building and land upon which it is built. A long leasehold (sometimes known as a “virtual freehold”) on the other hand is where the buyer acquires the rights to occupy and use a building and land (normally for decades/hundreds of years).
The use of long leasehold site assembly/sales has been industry standard practice particularly, for example, in the setting up of residential apartment blocks where services are provided to common areas within the block and controls are required over any changes to the apartments. It has also been regularly used on sites to ensure that common areas required by a Local Planning Authority to be provided by a developer (and which generally local authorities will no longer accept responsibility for post completion of a development) are maintained in perpetuity. As one of the terms of the long leasehold, it has been common practice for a ground rent (ordinarily a nominal annual payment) to be included and paid by the leaseholder to the owner (the freeholder/landlord).
Over recent years long leaseholds have become more commonplace in the sale of new-build houses in circumstances where a freehold interest would previously have been given. Against the backdrop of Government concerns to prevent those buying new-build leasehold houses being exposed to large ground rents and unreasonable leasehold terms, changes could potentially be made to the use of leasehold models in the context of new-build development.
In basic terms, consideration will be given to potentially (1) limiting the level of ground rents that can be charged; (2) excluding long leaseholds from possession orders over ground rent arrears; (3) changing the rules on Help to Buy equity loans so they can only be used for “new built homes on acceptable terms”; (4) potentially completing banning the use of ground rents on new-build leasehold homes; (5) potentially completing prohibiting the sale of new-build homes on a long leasehold basis.
The buying and selling of property, particularly where there are communal facilities, is a long accepted form of ownership and a “tried and tested” property structure. Whilst we need to await the outcome of the consultation process and the subsequent decisions of the Government, changes could have major implications and complexities for the way in which property sales are structured going forward, and make the need to take sound advice in relation to initial site assembly even more fundamental. At this time we do not know how any changes will affect long leaseholds and what terms may be considered both acceptable and unacceptable. Early advice on planning the terms of long leaseholds should also continue to be taken.
Contact details for our commercial property team are email@example.com or 01228 552600 / 01524 548494.