Ban on leasehold houses
Introduction
Following a last-minute rush through the House of Lords before the dissolution of Parliament, the Leasehold and Freehold Reform Act became law. It remains to be seen when the various provisions of the Act will be brought into force, but it seems inevitable that this will be high on the agenda of the next Government. The Act contains many significant reforms to the leasehold sector, but one major change is the ban of leasehold houses.
The ban of leasehold houses has been widely publicised and debated, but what is surprising is the level of detail in the Act regarding when a lease may be used and the steps that the parties must take when they propose to enter into such a lease.
Part 1 of the Act provides that a person may not grant or enter into an agreement to grant a long residential lease of a house after Section 1 of the Act comes into force. However, there is an exception to this rule and a landlord can grant a lease if it falls within one of the categories set out in Schedule 1 of the Act – these are known as ‘permitted leases’.
The types of permitted leases are split into two sub-categories; those for which Tribunal certification is needed (Schedule 1, Part 1) and those for which self-certification is required (Schedule 1, Part 2).
Permitted leases for certification by the First-tier Tribunal (Property Chamber) (‘the Tribunal’)
- Leases granted out of historic leasehold estates. The intermediate lease must have been granted before 22 December 2017 or after that date but pursuant to an agreement entered into before 22 December 2017.
- Community housing leases.
- Retirement housing leases (subject to conditions being met).
- Leases of certain National Trust property.
Permitted leases for self-certification
- Leases granted after Section 1 of the Act comes into force, but which are granted pursuant to an agreement entered into before that date.
- Shared ownership leases (where certain conditions are met).
- Home finance plan leases.
- Certain extended leases.
- Agricultural leases.
You could be forgiven for hoping that if a lease is a permitted lease that would be the end of the story but, unfortunately, that is not the case. The Act also sets out detailed processes for certification, requirements for marketing material and also transactional warning notices.
Permitted leases under Schedule 1, Part 1: Certification by the Tribunal
To enter into one of the permitted leases set out in Schedule 1, Part 1, a person must apply to the Tribunal for a ‘permitted lease certificate’. The Tribunal must issue the certificate where it is satisfied that the lease is / will be a permitted lease under Part 1. The certificate must also contain certain information regarding the house and the type of lease to be granted.
All permitted leases: marketing restrictions
All marketing material relating to the house must contain or be accompanied by certain information. This is referred to in the Act as the ‘permitted lease information’ which differs depending on whether the permitted lease is within Part 1 or Part 2.
If the permitted lease falls within both Part 1 and Part 2, the permitted lease information for both must be provided.
All permitted leases: transaction warning notices
A permitted lease or agreement for a permitted lease cannot be entered into on or after the day when Section 1 comes into force, unless the ‘transaction warning conditions’ have been complied with. The transaction warning conditions set out a process of notices between the landlord and the tenant which, as the name suggests, ‘warn’ the tenant that they are entering into a lease. The tenant is required to acknowledge receipt of the transaction warning notice. Reference to the warning notice and the notice of receipt will need to be included in or endorsed on the document.
The warning notice and response will be in a form specified by future regulations.
It is worth noting that a lease granted in breach of this provision will still be valid but may be subject to remediation and, in some cases, penalties may be imposed.
Land Registry requirements
Generally, long leases of houses which are granted after Section 1 comes into force and which are permitted leases, must contain a statement to that effect. The requirements of the statement may be prescribed in regulations.
Failure to include a statement in these circumstances will result in the Land Registry entering a restriction on the title that no further disposition (other than a charge) can be registered. This would require the lease to be varied to include the statement before a further registration is possible.
Redress & enforcement
If a long lease is granted in breach of Section 1, the tenant would have the right to acquire the freehold estate and any intermediate interest in the relevant land, for no consideration.
Enforcement of leasehold house restrictions will be carried out by local weights and measures authorities who will be able to impose financial penalties.
Summary
Although the Act provides for some lease structures in the case of houses, the requirements where there is a permitted lease are extensive. The purpose of these requirements is clear – to ensure that a purchaser fully understands the basis on which they are buying the house.
Registered providers who hold historic leasehold interests and are proposing to grant leases to their customers or those who will be granting shared ownership leases, must be mindful of the potential for these additional requirements.
If you would like to discuss any leasehold issues, please request a free initial consultation with one of our experts.
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