Canada: How Will The Government's Crackdown On Residential Leasehold Impact Developers?

Last Updated: January 12 2018
Article by Ashley Mitchell

On 21 December 2017, the Government published an eagerly awaited response to its July 2017 consultation on tackling unfair practices in the residential leasehold market. The key announcements, billed by the Government in a strongly worded press release as a "crackdown" on "abusive" and "feudal" practices, are considered below.

The latest announcement forms part of the Government's commitment, set out in its 2017 white paper, to "fix the broken housing market". Much is still uncertain at this stage; legislation will be needed to implement the majority of the measures, which relate to England only.

No new long leases of houses

This is the flagship announcement and had been widely anticipated. It will apply to existing houses (e.g. those undergoing refurbishment) as well as new-builds. Like many of the Government's proposals, the ban will require legislation in order to be implemented. It is therefore not in force yet. While some developers had already taken the decision to move away from selling leasehold houses, other developers face difficult decisions on existing part-sold sites. We are seeing a mixture of approaches from buyers, with some pushing back against leasehold acquisitions and others still happy to proceed. Where a plot is sold freehold rather than leasehold, some developers might propose a small increase in the sale price to reflect this. Inevitably buyers will start to push back given the Government's stated position.

There will be limited exceptions to the ban. Where houses are built on land which is already leasehold, then sale off on sub-leases may be permitted - but this only applies to land which was subject to a lease as at 21 December 2017. Other "limited" exemptions may be permitted following discussion with the industry. The press release refers to houses with shared services as a possible exception - the Government wants to ensure that any changes made do not have an adverse impact on the long-term sustainability of shared facilities, structures and open spaces. More detail is needed, as many developments could otherwise potentially fall into this category, which presumably cannot be the Government's intention. Shared ownership properties will also be exempt from the ban, along with (potentially) Community Land Trusts.

In the meantime, the Communities Secretary (now the Secretary of State for Housing, Communities and Local Government) has written to developers to "strongly discourage" the use of Help to Buy equity loans for the purchase of leasehold houses in advance of legislation.

Ground rent on new long leases of houses or flats to be limited to a peppercorn

Of equal prominence is the announcement that ground rent in new leases for a term of more than 21 years will have to be set at "zero financial value" (traditionally a peppercorn or equivalent). Again, this will require legislation in order to be implemented.

Part 1 of the CML Handbook contains no objection to a periodic increase of ground rent "provided that the amount of the increased ground rent is fixed or can be readily established and is reasonable". However, residential lenders had already started to alter their approach to ground rents on new-build properties. While the Handbook currently remains unchanged, it is possible that we may start to see individual lenders adopting the Government's stated position, even in advance of legislation.

The consultation response states that "Government will also work with UK Finance to address misunderstanding of lending criteria with regards to leasehold properties."

It is clear that the effective abolition of ground rent on new properties will significantly impact on the value of reversions, and so on the business model currently adopted by a number of housing developers. Whether this will result in an increased sales price for new plots remains to be seen, although the Government has acknowledged it as a possibility.

As with leasehold houses, developers on part-sold sites are faced with whether to take the plunge and remove the ground rent on unsold plots now, or whether to wait to see how things play out during the course of the year. There is no easy answer (there is no indication that there will be any transitional provisions for existing sites), although the Government's stated intention to also tackle onerous ground rent terms in existing leases (see below) may have a bearing on the decision. Where developers decide to continue imposing ground rent in new leases pending legislation, it would be sensible to future-proof those provisions as far as possible.

Support for those currently suffering from onerous ground rent terms

The proposed ban on ground rents does not apply to leases which have already been granted. However, the Secretary of State will write to developers to ask those who have customers with onerous ground rent terms to provide "necessary redress". The Government is also to work with redress schemes and Trading Standards to provide tenants with information on routes to redress open to them, including, in appropriate circumstances, a claim for mis-selling, or a possible negligence claim against the conveyancer who acted for them on the purchase.

Many developers have already been proactive in seeking to replace onerous rents, such as those which double periodically, with those based on (for example) an RPI increase. The Government has recognised that a number of developers have introduced schemes to compensate individuals, but has said that these must "go further and faster", with existing tenants (including second hand buyers) being proactively contacted. It is unclear how the Government will proceed in relation to existing leases and it is very much a case of watch this space.

Housing developers with a ground rent portfolio, ground rent investors, and their lenders, will all need to consider what strategy to pursue - not an easy task when the goalposts may shift. Doing nothing, however, would not appear to be an option.

Making it easier to extend a residential lease or acquire the freehold reversion

According to the press release, there were 4.2 million leasehold dwellings in the private sector across England in 2015-16 (of which 1.4 million were leasehold houses). The Government is to work with the Law Commission (an independent body tasked with law reform) to consider how the process for tenants to buy their freehold could be made easier, faster and cheaper, with particular priority being given to tenants of houses. A consultation will be issued on the introduction of a prescribed formula "that provides fair compensation to the landlord, whilst also helping leaseholders avoid incurring additional court costs". The consultation response states that the Government will "work with UK Finance to encourage lenders to assist consumers wanting to purchase their freehold".

The Government will consider introducing a right of first refusal for tenants of houses on the disposal of the freehold (currently such a right is only available to tenants of flats).

The Government will also consult on proposals to enable tenants to exercise their existing right to extend their lease "on more favourable terms". In particular, it notes that some tenants may become subject to very high "modern ground rents" when extending their lease. The Government also wants to introduce a minimum lease term for new long leases of flats, designed to give the leaseholder greater security, and protect them from incurring costs on a lease extension.

There is, in this part of the response paper, some indication of timing - the Government aims to bring forward solutions by the summer recess - but legislation will be "when Parliamentary time allows".

Giving residential freeholders equivalent service charge rights to leaseholders

Residential tenants currently have certain statutory protections in relation to service charges, including a right to challenge the reasonableness of the charge. The government proposes to extend these protections to freeholders who pay a service charge for the maintenance of communal areas and facilities on a private or mixed use estate.

Other things included in the announcement

The 32 page response to the consultation paper includes a number of other proposed measures, including:

  • Protecting long leaseholders with ground rents against the risk of a mandatory possession order in the event that they fall into arrears with the rent. This is due to a legal loophole whereby a lease becomes an assured tenancy (more commonly used in short term lettings) if ground rent exceeds £250 per year outside London or £1,000 in London.
  • Preventing a rentcharge owner from exercising its right to take possession of the property, in circumstances where the rent under the rentcharge is unpaid by the property owner for a short period of time. Estate rentcharges are used in some developments where plots are sold freehold, in order to ensure that provisions relating to the maintenance and upkeep of communal areas on the estate can be enforced.
  • Proposals to reinvigorate commonhold. Commonhold is a method of setting up ownership of units on an estate that does not rely on the use of leasehold. Each unit owner owns their unit freehold, and also owns a share in a management company which owns the common parts. Legislation facilitating the use of commonhold has been on the statute books since 2002, but it has never taken off. The Government believes that one of the reasons for this is the financial incentives for developers in building leasehold, but it also acknowledges that access to finance and consumer awareness have both played a part. The Government will work with the Law Commission to re-visit commonhold, looking at both what reforms might be needed to the law, and also how Government can support commonhold to get off the ground. Buy-in from lenders will be a critical part of this process.

Next steps

There is, as yet, no indication of when the necessary legislation will be brought forward (the response simply stating that it will be "as soon as Parliamentary time allows"). However, given the recent re-naming of the former Department for Communities and Local Government, the Government has left us in no doubt that housing is front and centre of its policy objectives. The message has been received loud and clear; the devil will be in the detail.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions