TO VARY OR NOT TO VARY?
TO VARY OR NOT TO VARY?
“BEING ASKED TO PAY A NOT INSIGNIFICANT AMOUNT FOR THE PRIVILEGE OF EXCHANGING A BAD LEASE FOR A WHAT MAY WELL BE ONLY A MARGINALLY LESS-BAD LEASE IS NOT NECESSARILY A GOOD DEAL.”
THE PLIGHT OF OWNERS OF MODERN, NEW-BUILD, LEASEHOLDS
A lot has been written about the plight of leaseholders, of mostly, newbuild houses and flats, burdened with “onerous leases” (as to the meaning of which there is no agreement). The Housing Act Trap has had the incidental effect of turning those with “onerous” ground rents into assured shorthold tenancies, many of which, by virtue of those ground rents and other “onerous” terms are costly and impossible to ‘enjoy’ in both the legal and common senses of the word and impossible to sell.
Poor publicity has led many of the major national housebuilders, whose inventiveness (for want of a better word) created the problem in the first place, to offer lease variations, without, they would say any “onerous” terms.
“NOT ONLY GROUND RENTS THAT CAN BE ONEROUS; PERMISSION FEES, WIDELY CRITICISED AS BEING EXORBITANT HAVE BEEN INSERTED INTO “MODERN” NEW BUILD LEASES”
THE MEANING OF “ONEROUS”
Just dealing with what “onerous” actually means, the lack of agreement is highlighted by three pieces of evidence given in the course observations of the HCLG Select Committee’s enquiry:
” The problem is that there is no real definition of what an onerous ground rent is.”
– David Jenkinson, Group Managing Director and Main Board Director, Persimmon in oral evidence to the HCLG Select Committee, 19th November 2018.
“ As Bellway, we do not have any onerous leases. Our standard lease is based upon a rent review based on RPI, which is acceptable to all the main lenders.”
– Jason Honeyman; Chief Executive, Bellway – ibid.
“ Ultimately the market will decide what constitutes an “onerous” ground rent.”
– John Tutte, Group Chief Executive, Redrow plc in a letter to Clive Betts MP 10th January 2019
Don’t forget that it is not only ground rents that can be onerous; permission fees,widely criticised as being exorbitant have been inserted into “modern” new build leases which mean a range of perfectly normal things that would generally be part & parcel of the enjoyment of normal leasehold ownership, require not only the permission of the freeholder but payment of a sum which bears no relation to the cost and can only have been designed to turn a profit for the freeholder and/or their managing agents.
The term “onerous” is derived from case law and the debate about what it means as a matter of English is largely sterile because a competent conveyancer will not look at a term and ask: “Is it onerous?” but “Is this something which materially affects what the buyer is buying?”.
In relation to the Housing Act Trap, because, when an escalating ground rent provision takes the ground rent over the £1,000/£250 limit, the system of tenure and the leaseholder’s rights will be changed fundamentally, an escalating ground rent clause is something about which a potential buyer must be warned, so as a matter of law, unless subject to a £1,000/£250 cap, all escalating ground rent clauses are “onerous”.
The recent Tenant Fees Act 2019, which does nothing to assist existing or long lease holders, does at least help provide some guidance as to what an onerous permission fee might be – essentially anything which is over £50 or not a true reflection of the cost to the freeholder, although if permission is required for a large range of utterly normal acts of enjoyment of a property, my advice would be that that in itself would make the lease onerous regardless of the cost of permissions.
“LEASE VARIATIONS THE HOUSEBUILDERS ARE OFFERING WILL NOT, FOR THE MOST PART, MEAN THE VARIED LEASES ESCAPE BEING ONEROUS. WHAT THEY GENERALLY WILL BE, HOWEVER, IS SALEABLE.”
VARIATION OF ONEROUS LEASES
The lease variations the housebuilders are offering will not, for the most part, mean the varied leases escape being onerous. What they generally will be, however, is saleable. The variations are, however, generally offered at a cost, which is not self-evidently fair, given that the original leases were, in the first place, onerous and marketed using what have been widely criticised as high pressure sales techniques.
I don’t know what I would do as a leaseholder offered a variation; the benefits of obtaining a saleable asset are considerable, particularly if there is a pressing need to move house but being asked to pay a not insignificant amount for the privilege of exchanging a bad lease for a what may well be only a marginally less-bad lease is not necessarily a good deal.
For those not contemplating moving in the near future, it may not even be a long-term solution because the mortgage industry has been even slower to take on board the ramifications of the Housing Act Trap and onerous permission fees than was the legal profession. What is mortgageable now may not necessarily remain so.
It seems fairly likely that whatever the political complexion of the government that eventually finds time for much more than crisis-managing Brexit, it will ban the sale of leasehold houses and put strict limits on ground rents under long leases of flats, so the current crop of leaseholds even post-variation, if they still carry high levels of ground rent and still include an extensive list of permission fees, could become unsaleable or much harder to sell when those reforms are introduced because the new leaseholds will be so much more attractive to buyers.
It needs to be borne in mind too that a deed of variation may well include a clause which prevents (or seeks to prevent) legal proceedings based, for example, on past mis-selling.
Some people are holding out hoping that the Government will come round to legislating retrospectively. Others are exploring enfranchisement or litigation options. There are other possibilities. In order to avoid a trading standards prosecution, Persimmon recently handed over the freeholds of new build homes in Cardiff but robust trading standards actions have been the exception rather than the rule and this is, therefore, a rare case.
What is clear is that there is currently no perfect solution. Conveyancers handling variations are not absolved of explaining the terms of varied leases and the terms of any deed of variation simply because the lessee is getting out of a very bad deal but it may be that those contemplating a variation ought to be given more wide-ranging advice about all their possible options than a conveyancer instructed simply for the purpose of a contemplated variation is qualified to give.