Don't get caught in the leasehold property trap

Excessive ground rents, charges and ownership restrictions can make leasehold homes difficult to sell. What can you do to avoid the leasehold property trap?

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Leasehold flats

The leasehold scandal

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,
  • their ground rent will increase - in some cases doubling every 10 years.

In many cases, recent buyers are finding that all three of the above apply.

The government has banned the sale of new leasehold houses and they have pledged to review leaseholder rights more generally. However, the proposals do not address compensation for leaseholders who have been overcharged.

What is leasehold?

A lease is essentially a long-term rental agreement - typically between 99 and 999 years.

A lease is issued by a freeholder (landlord) for a fixed term. Once the term expires, the leaseholder loses the right to use the property and ownership of the lease will revert to the freeholder.

A flat may be part of a purpose-built block or it may be part of a house that has been converted into flats. Most flats in England and Wales are leasehold. However, the past few years have seen an increase in the number of leasehold houses.

Read more:

Should I be wary of buying a leasehold house?

Why does leasehold exist?

Leasehold has existed as a legal concept for centuries.

When cash-strapped aristocratic landowners 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 leasehold arrangement ensures that common areas are maintained and that leaseholders are obligated to contribute to the cost of maintenance. Contributions towards the maintenance of the property are usually collected as service charges.

How have leaseholders been caught out?

New build developers have been accused of using the leasehold and ground rent mechanism to exploit buyers.

Over recent years it is estimated that over 1 million new houses have been sold with a leasehold tenure. In most cases, there is no clear reason why a detached, new build property should be sold as leasehold.

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 who are unfamiliar with leasehold property may have missed excessive or unusual conditions imposed by developers, such as:

Buying the freehold

As buyers stretch their finances when buying a home, they may forgo the option of buying a share in the freehold at the same time. Leaseholders who subsequently decide to try and buy the freehold may discover 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 any future lease extension premium.

Spiralling ground rent clauses

In addition to service charges, ground rent is an annual payment made by a leaseholder to a freeholder in accordance with the terms set out in the lease. Ground rent is effectively rent paid on the land on which the leasehold property sits.

A common feature of leasehold houses is a doubling or 'spiralling' ground rent. This clause in the lease is the main area of controversy surrounding leasehold houses.

Some house leases stipulate that the ground rent will double every ten years. A new owner may be unperturbed by an initial annual ground rent of £500. However, a doubling ground rent becomes prohibitively expensive over time. Leaseholders could become trapped - unable to afford the ground rent and unable to sell the house.

Aside from the cost, this will make the flat more difficult to sell.

No escape for some leasehold owners

Some new-build leaseholders are finding it almost impossible to sell their property.

Many major lenders refuse to lend on properties that have onerous ground rent clauses.

The Nationwide, for example, states that it will not lend on a property where the ground rent...:

'... doubles less than every 20 years (e.g. doubles every 5, 10 or 15 years)'

Increasingly aware conveyancing solicitors are also warning off buyers.

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 also be more expensive than shopping around. Many buyers are also not aware of the potential conflict of interest that arises in these circumstances.

What is the government doing about it?

The issue of how to reform leasehold has been debated for decades.

The government has banned the sale of new leasehold houses and they have pledged to review leaseholder rights more generally.

At the time of writing, the government is also considering legislation that will give leaseholders the right to extend their leases to 990 years with zero ground rent

There are also plans to push the commonhold system in the future by setting up a 'Commonhold Council', which will include property industry representatives and leasehold groups.

The question remains as to what can be done to assist existing leaseholders caught out by unreasonable clauses in their lease. Compensation schemes are being set up by some developers. Others have agreed to reduce ground rents to zero and to increase existing leases to 999 years.

However, campaigners have stressed that the programmes are inadequate. Despite the new-build leasehold property ban and the prospect of legal action against negligent solicitors and developers accused of mis-selling, there may be no easy solution for existing leaseholders.

See also:

What do I need to do before selling a leasehold flat?

What do I need to know before buying a leasehold property?

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Gaynor Haliday, Legal researcher

Author:
Gaynor Haliday, Legal researcher