GOVERNMENT PLANS TO BAN NEW-BUILD HOMES WITH RIP-OFF LEASEHOLDS IN ENGLAND – AND HERE’S WHY
HOMEBUYERS LOCKED INTO LEASES WITH SPIRALLING GROUND RENTS
The leasehold housing scandal is a hot topic in the media and Government has now pledged to clampdown on unfair practises in the market. While the pitfalls don’t affect everybody who has bought a new-build leasehold property, some have been hard hit by doubling ground rent schemes and other charges they hadn’t bargained for when they got the keys to their dream home. In this article, we look at some of the issues.
Leasehold new-build houses
Traditionally, leasehold properties are flats which have shared communal spaces such as lifts, entrance halls and roofs.
But in the last few years major developers have increasingly sold new-build houses as leasehold, “a practice which was unheard-of 20 years ago,” says campaign group Homeowners Alliance. An estimated 1.2 million of the UK’s 4 million leasehold properties are now houses. Some 21 per cent of private housing in England is owned by leaseholders with 30 per cent of those properties houses rather than flats, according to figures from the Department for Communities and Local Government (DCLG).
What are service charges?
The mortgage is not the only cost you will need to pay if purchasing a leasehold property. Buyers of leasehold properties pay an annual service charge to maintain common areas and a ground rent – typically a peppercorn rent or nominal charge - for the land the property sits on.
Soaring ground rent and rip-off fees
Ground rents shouldn’t be a problem for most leaseholders. But an estimated 100,000 have been caught out by clauses allowing for ground rents doubling every decade, meaning ever bigger bills. In one case cited by the Department for Communities and Local Government, a family home is now unsaleable because the ground rent is expected to cost £10,000 by 2050. Leaseholders may also have to pay for permission to carry out minor improvements. It is mainly first-time buyers who have been affected, including some who bought their home through the Government’s Help to Buy scheme.
In July 2017, Government launched a consultation into banning unfair leasehold practices, including multiplying ground rent terms buried within contracts. Communities Secretary Sajid Javid said the proposals would affect future sales and those already having problems would need to seek compensation from the housebuilder, or if the situation was not made clear, their solicitor.
To date, developer Taylor Wimpey has earmarked £130m to compensate leasehold buyers caught out by such clauses. Meanwhile Nationwide has become the first high street lender to refuse to give mortgages on leasehold homes with unfair ground rent clauses.
What does the Government propose to do?
Under government plans out for public consultation, leasehold on new-build houses would be totally banned while ground rents for flats could be dramatically reduced to zero.
Announcing the consultation, Mr Javid said: “It is clear that far too many new houses are being built and sold as leaseholds, exploiting home buyers with unfair agreements and spiralling ground rents. Enough is enough. There practices are unjust, unnecessary and have to stop.”
Freehold vs leasehold
A freeholder is someone who owns a property outright, including the land it is built on. Most houses are sold as freehold. With a leasehold, the buyer owns the dwelling for the length of time of their lease agreement but not the land it stands on. Leaseholders have to pay the freeholder a ground rent and other fees. When the lease ends, ownership returns to the freeholder unless the person can buy or extend the lease. There have been cases of house builders selling the freehold on to investment companies without telling the leaseholders who have then been quoted exorbitant prices to buy the freehold.