As ministers launch another consultation into leasehold abuse, Emma Lunn asks if enough is being done to support those struggling under onerous ground rents.
Leasehold has repeatedly hit the headlines over the past couple of years, not just in the trade press but national newspapers too.
Issues with this type of property ownership have led to the government announcing a consultation on plans to combat leasehold abuse – the second consultation on the same subject in the past 18 months. The new proposals are aimed at improving the sector for would-be homeowners and ending the unfair selling of new houses as leasehold.
Under the latest plans, the majority of new build houses would be sold as freehold.
Where leaseholds were sold, ground rent would be capped at £10, down from the current average of £300.
Some critics say the proposed reforms do not go far enough. Leasehold Knowledge Partnership director Sebastian O’Kelly describes them as “pathetic and flawed”, and has criticised housing secretary James Brokenshire for watering down plans put forward in December 2017 by then communities secretary Sajid Javid.
Javid planned to force developers to cut ground rents to zero for all new apartments and houses, as well as promising to free leaseholders from “feudal practices”.
“Why £10? What is this for? Ground rents are for no designated service whatsoever. Just end them,” says O’Kelly. “Even £10 is a danger for leaseholders.
LKP is aware of debt collecting solicitors chasing these, and adding costs, getting them up to £600. What is needed is: stop creating more leasehold.”
According to the ministry of housing, communities and local government, there are about 4.3 million leasehold dwellings in England, including 1.4 million houses. Numbers have jumped sharply in recent years due to an increase in apartment building in cities, and the practice of developers selling new build houses as leasehold.
“Leasehold is a well-established title for property and the vast majority of property on leasehold title will face no adverse issues,” says London and Country’s David Hollingworth. “However, there can be issues that will impact buyers and sellers, some of which are simply a function of a reducing term, and others that have been created through the conditions applied.”
The past decade or so has seen thousands of houses built by major developers such as Taylor Wimpey, Persimmon and Bellway, sold on long leases.
Unsuspecting first-time buyers were frequently told by developers’ sales staff that 999-year leases were “virtually freehold”, while conveyancers failed to explain the implications of important clauses in jargon-heavy leases.
Ground rents are the biggest issue with leasehold houses. Housebuilders have turned these payments – traditionally set at “peppercorn” levels – into a lucrative income stream desired by pension funds and investors.
New types of ground rent clauses have seen higher starting figures, often between £250 and £500 per year, coupled with regular reviews. The most onerous ground rents double every 10 years, while others rise in line with RPI inflation.
These increases can make a property unaffordable for its current owners, unmortgageable and subsequently tricky to sell. Let us take a fairly common example: a new build house with an initial annual ground rent of £250 doubling every 10 years, for 50 years. What appears to be a relatively modest ground rent will soon morph into a significant liability. Annual ground rent in the 50th year, and each year after that, will be £8,000.
Nationwide was the first major lender to publicly set out its lending criteria regarding leasehold. It will not lend where the initial ground rent is more than 0.1 per cent of the property’s value, or where ground rents double every five, 10 or 15 years. Most other lenders have more or less followed suit and there are now virtually no lenders who will consider leases where the ground rent doubles each decade. This leaves thousands of leaseholders unable to remortgage and with little chance of selling either.
Leaseholders often face other fees too, such as maintenance charges for communal land within a private estate, fees for the freeholder’s consent to make alterations to their property, plus ad-hoc fees for a “licence” to have a pet or to sublet the property.
SPF Private Clients associate Elena Todorova says selling houses as leaseholds is wrong. “I can understand the merit behind keeping leaseholds on flats but when it comes to houses, one of the rights and delights of being a homeowner is to enjoy the absolute ownership of a house and a piece of land,” she says.
“I cannot see why a developer should keep a freehold on a house and sell a leasehold instead, apart from as a way to make more money.”
Freeholds sold off
Buying the freehold to their home is the only way leaseholders can avoid paying ground rent and other fees set out in their lease. Many buyers were told by house builders’ sales staff they could purchase the freehold to their property at a later date for £3,000 or £4,000.
But here is where developers pulled their next trick. As soon as a new estate was complete, freeholds were quietly packaged up and sold to offshore investors attracted by the reliable and increasing income stream. These investors then demanded £40,000 or more to sell the individual freeholds to the leaseholders.
It is no wonder many new home buyers feel they were mis-sold. They now find themselves in a situation where they cannot afford increasing ground rents or to buy the freehold, and also find they cannot sell their property because publicity around the issue has adversely affected its saleability. The latest government proposals do nothing to help these leaseholders.
“While the outlook for new buyers is that leasehold conditions will likely have ground rent pegged to inflationary increases and prevent excessive charges being applied, that doesn’t solve the problems for existing borrowers,” says Hollingworth.
“That is only complicated by the fact that many of the freeholds have been sold on to investors.
“Political and legal firepower may still be required to remedy the situation for those that would otherwise be stuck in a property that could be declared worthless.”
In theory, leaseholders with ground rent rising in line with RPI or doubling every 20 years, or less frequently, should have fewer issues remortgaging or selling than those with the most onerous leases. But many still feel aggrieved.
A report by NAEA Propertymark entitled Leasehold: A Life Sentence? found almost half (45 per cent) of leasehold house owners did not know they were only buying the lease until it was too late, two thirds (62 per cent) felt they were missold, and the vast majority (94 per cent) regretted their purchase.
Issues with leasehold flats
Although the government consultation was triggered by accusations of the misselling of new build houses, flat owners have had issues with leasehold for many years. There are arguments for flats to be sold as leasehold as there is a need for a mechanism for maintenance of the communal parts of a building.
But the system is open to abuse as freeholders, or the managing agents they employ, decide the work to be done and which contractors will do it. Bills, inflated by commissions and management charges, are passed to leaseholders.
How little control leaseholders have has come to light in the aftermath of the Grenfell Tower disaster. Since the fire in June 2017, more than 300 tower blocks have been identified as having cladding that has failed fire tests.
Where blocks are privately owned, a legal battle between freeholders, insurers, developers and lawyers is being waged. Leaseholders are stuck in the middle and potentially face multi-million pound bills for the removal of unsafe cladding.
However, from a mortgage lender’s point of view, the main issue with leases on flats tends to relate to the length of the lease.
“As a lease reduces, it has the potential to put buyers off and anything that could limit the marketability of a property is something that lenders will want to avoid.
“As a result, lenders will typically have very clear minimum remaining leasehold terms when the mortgage is taken out,” explains Hollingworth.
It is worth remembering the government has a direct financial interest in leasehold issues. Many leaseholders used Help to Buy to purchase their homes, so taxpayers will bear part of the loss where lease terms have devalued a property.
John Charcol senior technical manager Ray Boulger says the government should use developers’ huge reliance on Help to Buy to force them to do the right thing. “Nothing will concentrate developers’ minds more than something which will hit their profits and so I would like to see the government give developers reasonable notice, no more than six months, that if all buyers to whom they sold a property with ground rent doubling every 10 years are not compensated within, say, six months, the developer will cease to have access to Help to Buy,” he suggests.
“If the developer has sold on the ground rents, it will have to come to an agreement with the company it sold them to, but that should not be an excuse for the developer to delay compensating its purchaser.”
Conveyancers are also likely to see legal action over their part in what has been dubbed “the PPI of the property industry”. FS Legal has already started action against dozens of solicitors on behalf of its 500-strong client base who claim they were not adequately advised about ground rents and the consequences of scheduled reviews. Many leaseholders were incentivised to use a developer’s recommended solicitor, leading to an obvious conflict of interest. If FS Legal’s case is successful, it could open the floodgates for many more leaseholders to sue their solicitors.
Questions also need to be asked of lenders and their valuers. Should they have spotted future saleability and mortgagability issues when the initial mortgages were granted? “Absolutely,” says Boulger. “I don’t understand how any surveyor can value a property without knowledge of the lease and ground rent terms.
“This failure may have been partly caused by lenders driving valuation fees down to a level which meant valuers couldn’t do their job properly. If so, lenders have to accept some responsibility, but prime responsibility must rest with the valuers.”
As it stands at the moment, the future for leasehold looks unclear. Freeholders, investors and ground rent speculators are not going to take reform lying down, but mortgage lenders are becoming increasingly risk-averse when it comes to lending on leasehold homes. Leaseholders, meanwhile, continue to be stuck in limbo.