Britain has had leasehold homes for hundreds of years, but only in the past few months has the ground rent scandal exploded. Now the government is proposing a complete ban on new houses sold as leasehold, and reducing ground rents to zero.
What are leasehold houses?
Traditionally, houses have been sold as freehold, and the buyer has complete control over their property. When a house is sold as leasehold, the buyer is effectively only a tenant with a very long term rental, with the ground the home is built on remaining in the hands of the freeholder. The home buyer has to pay an annual “ground rent” to the freeholder, and has to ask the freeholder for consent if they want to make any changes to the property, such as building a conservatory or changing the windows.
Why have they suddenly become such a problem?
In the past, leasehold property owners were generally charged just a “peppercorn” ground rent, sometimes as little as £1 a year, and many freeholders did not bother to collect it. But the picture changed earlier this century, when developers started to insert clauses into leasehold contracts where the ground rent was set at £200-£400 a year, doubling every ten years. Direct Line estimates the typical ground rent to be currently £371. Although unsuspecting first-time buyers were frequently told that 999-year leases were “virtually freehold”, the clauses meant that the ground rent would soon spiral to absurd levels. The government quotes a family house where the ground rent is expected to hit £10,000 a year by 2060.
How many people are affected?
The Leasehold Knowledge Partnership, which has vigorously campaigned on this issue, estimates that around 100,000 homebuyers are trapped in contracts with spiralling ground rents. There are many more people in leasehold flats, some of which also have doubling ground rents.
Is it just the ground rent that is the issue?
No. Freeholders are able to extract other sums out of their leaseholders in a variety of ways. Homebuyers report being charged £100 even to have a letter answered by the freeholder, and as much as £2,500 for permission to build a conservatory. These are charges that are on top of obtaining planning permission.
Why don’t leaseholders just sell up and get out?
Many can’t. They find their homes almost unsaleable, because lenders, particularly Nationwide, won’t grant mortgages against homes with onerous ground rent clauses, while conveyancing solicitors will warn prospective buyers off. Homes blighted by ground rent are saleable only at a huge discount.
Can leaseholders buy their freehold?
There has been an extraordinary escalation in prices for freeholds. At the time estates were built, buyers were typically told they could buy the freehold for £3,000-£4,000. Most did not. After the estate was finished, the developer would make a large profit by selling the freeholds on, typically for around £5,000 to £10,000 each, to the many companies keen to buy them for the valuable stream of income they offer. When homeowners ask to buy the freehold back, they are frequently asked for £40,000 or more.
Why are the freeholds now so expensive to buy?
A rent that doubles every ten years is effectively a return on investment of 7% a year. That’s a guaranteed, and legally enforceable income that is worth a phenomenal amount to financiers when Bank of England base rate is now just 0.25% a year.
Aren’t the original conveyancing solicitors at fault?
It is estimated that seven out of ten buyers of recently built leasehold homes used the conveyancing solicitor recommended by the developer. The buyers, usually young and never having bought a home before, say the risks were not drawn to their attention. Now many of these conveyancers face multiple legal actions, accused of conflicts of interest and failing to warn buyers.
Is this a problem for houses but not flats?
Yes and no. Lots of new-build flats as well as houses have doubling ground rent clauses, and so face the same problem when they come to sell. There is also evidence that the owners of older leasehold properties, such as those above shops, have seen steep ground rent figures inserted into their contracts. But while it is evident that houses can be sold as entirely freehold, that’s not the case with flats, which where the care of the building needs to be jointly organised. But outside of England, this is usually arranged using the “commonhold” approach, with each flat owner having a part-share of the freehold.
What is the government doing?
It has proposed a ban on the future sale of houses as leasehold, as well as cutting ground rents to zero. But serious questions remain about the future of people in existing contracts. The government wants to see more compensation programmes, such as the £130m assistance scheme set up by Taylor Wimpey, although that scheme has been widely condemned as inadequate by campaigners.
