Don't get caught in the leasehold property trap
Updated: March 27, 2018
The Government has announced a consultation into the possible ban of new build leasehold property, following reports in national newspapers and on the BBC.
What's all the fuss about?
Some recent buyers of leasehold property who opted not to buy the freehold from the developers when they purchased are now learning that:
- the cost of acquiring the freehold has significantly increased or,
- the freehold has been sold to another party or,
- the ground rent has increased, or will increase, by a significant degree.
In many cases, recent buyers are finding that all three of the above apply.
Why does leasehold exist?
Leasehold has existed as a legal concept for centuries.
When cash-strapped aristocratic land owners sold off land to merchants and factory owners to build housing for workers, leasehold provided a mechanism whereby the lord could retain some ownership over the land on which the property stood (the freehold).
Flats are commonly leasehold because this provides a way to impose certain conditions on both the leaseholders and the freeholder. The arrangement ensures that common areas are maintained, and that leaseholders could be required to contribute to this maintenance.
In more recent times, single-dwelling properties in London and other densely-populated cities are commonly subdivided into flats.
A leasehold agreement ensures that where repairs to are required on a part of the property that only affects one owner (e.g. a leaking roof affecting only the top-floor flat), all the owners in the building will pay towards the repairs.Back to top
What is ground rent?
In addition to contributions to repairs, to management of common areas, or maintenance fund, leaseholders will also pay ground rent to the freeholder. In many cases, this ground rent is a nominal fee, sometimes called a "peppercorn rent", and exists solely for legal reasons.
However, new build developers have been accused of using the leasehold and ground rent mechanism to exploit buyers. In many such cases, there is no clear reason why a detached, new build property would be sold as leasehold.Back to top
Buyers of newly constructed leasehold homes often do not read the small print, or may not have the consequences of their purchase explained to them by their conveyancer.
Some solicitors are not familiar with leasehold property, particularly in regions of the UK where such property is rare, and may not fully recognise where developers are imposing excessive or unusual conditions.
Buying the freehold
As buyers stretch their finances to afford a home, they may opt to forgo buying the freehold when they purchase the property. At the time, the freehold is often offered at a relatively low sum.
When the buyer decided to purchase the freehold at a later date, they frequently find that the freehold has been sold to a third-party management company or other entity. This third party may then charge much more for the freehold.
The third-party will typically be content to sit on the freehold as a long-term investment, collecting ground rent, along with the eventual lease extension premium when the lease gets close to the 80-ish year limit imposed by most mortgage lenders.
Exponentially large peppercorns
In some cases, buyers are surprised to find clauses in their leasehold agreement that impose a % increase on the ground rent each year.
In a Government report published earlier in the year, the ground rent increase imposed on one family home meant that by 2060 the fee would be over £10,000 a year.
Doubling ground rent clauses
Some ground-rent increases are increase accordance with no recognisable formula, often doubling after a incremental periods of time
In many cases, the initial ground rent is set to double every ten years.
Cases of leaseholders who will be paying ground rents of £10-20k pa. are coming to light.
Aside from the cost, this will make the flat more difficult to sell.
No escape for some leasehold owners
Some owners of these new build leaseholds are finding it almost impossible to sell their property.
Major lenders, including Nationwide, refuse to lend on properties that have onerous ground rent clauses, and increasingly-aware conveyancing solicitors are also warning off buyers.
Where these properties are sold, it is often at a significant discount and in some cases at a loss.Back to top
Who is at fault?
Although solicitors are becoming increasingly aware of the risk to the purchaser that these new build leaseholds represent, and will advise their client accordingly, only 3 in 10 buyers of new build properties choose an independent solicitor.
Developers will usually recommend that buyers use their own preferred law firm to carry out the conveyancing.
While this approach can often be faster, it may be also be more expensive than shopping around. Many buyers are also not aware of the potential conflict of interest that arises in these circumstances.Back to top
Will the Government act?
The issue of how to reform leasehold has been debated for decades.
Last century, the debate frequently stalled as many politicians, including members of the House of Lords, were longstanding landlords.
The simplest proposed solutions would be to ban all future sales of leasehold property or cut all ground rent to £0.
The question remains as to what do with existing leasehold property. Compensation schemes are being set up by some developers, but campaigners have stressed that the programmes are inadequate.
Despite new plans to ban new build leasehold property, and the prospect of legal action against negligent solicitors and developers accused of mis-selling, there may be no easy solution for existing owners.