The government has banned leasehold new-build houses, but what can leaseholders who have already bought their home do to escape their contracts?
There are 4.2 million leasehold properties in the UK with an estimated 100,000 affected by onerous ground rents.
Some leaseholders will see their ground rents rise to more than £10,000 a year over the next four decades, while the cost of buying their freehold to escape this clause may become impossible with prices rising tenfold.
The government is currently changing the law so that all new-build houses – but not flats – have to be sold as freeholds and all ground rents on new leases will be slashed to zero.
The Competition & Markets Authority has also launched an investigation into the housing market over the mis-selling of leasehold properties, which will look into permission fees, ground rents and other terms associated with leasehold properties.
Developers and freeholders could face legal action if the watchdog finds evidence of leasehold mis-selling.
But in the meantime, leaseholders in England are paying £447 million a year in ground rent, with one in 10 saying the cost is already affecting their quality of life, according to a report by regulator Propertymark.
“The government plans are little comfort to those already on leasehold contracts. Doubling ground rent has created massive problems for sellers and buyers,” says Milena Matthew, an associate at KhanMather Solicitors.
What is ground rent?
When a home is sold as a leasehold, the buyer owns only the house itself. The freeholder owns the land on which the property sits and charges the property owner a ground rent – an annual fee, which is meant to reflect the value of occupying the land. In the past, ground rent was set at zero or a nominal fee and was largely charged to flat owners.
The purchaser occupies the property on the terms set out in a legal agreement called a lease. These are usually granted by the developers for long periods, such as 250 years or 999 years, and can include additional charges such as fees to build an extension or to remortgage the property. This is separate from service charges, an additional cost to many leaseholders.
In recent years, developers have been selling houses as well as flats on a leasehold basis, then selling the freeholds on to third parties such as investment companies.
“Historically, ground rents have been low – no more than around £50 a year. However, in the past few years, house builders have started to increase ground rents to an initial charge of between £250 to £500 a year,” explains Daniel Brumpton, a partner at law firm Nelsons.
“They have also added clauses in the lease that allow them to review the ground rent periodically, for example, every five, 10 or 25 years. Typically, the review clause allows the freeholder to increase the ground rent at each review.”
Rocketing costs and negative equity
Many homeowners who bought property over the past 20 years were unaware of doubling ground rent clauses because it was not highlighted by developers or conveyancers.
“It is a case of landlords being a little greedy and purchasers not reading the documents properly,” says Stephanie Kleyman, director of management consultancy firm COYS London Limited.
Consumers have also been stung by increases in buying the freehold because it was sold on to investors, who hiked up the cost – in some cases by 900%. This has left leaseholders with no way of escaping rising ground rent costs as they cannot buy the expensive freehold or sell their property.
Leasehold property management is only partially self-regulated meaning leaseholders have limited recourse.
“People are getting trapped. Mortgage lenders have caught on and won’t lend on these properties. When it comes to selling them, the potential buyer will struggle to get a mortgage on the property even if the original buyer got it,” explains Lesley Price, head of New Build & Shared Ownership at Lawcomm Solicitors.
“This clearly has a huge effect on the value of these properties, and, in some cases, they may well be worthless. Even to a cash buyer, a property affected by the onerous ground rent terms will be unattractive, as the burden of the clause will be inherited via the purchase,” adds Mr Brumpton.
Property manager Philip Crawford, 58, says doubling ground rent has destroyed the housing market in Swinton in Greater Manchester, with many homes being sold at auction and property prices crashing.
He bought a one-bedroom flat in 2015, with a ground rent which has already doubled to £400. By 2027, the rent will be £800 a year.
“I wasn’t aware of the doubling ground rent when I bought it. I am a second-time buyer, so Taylor Wimpey won’t do anything. It should never have sold the freehold behind our backs,” he says.
The block of flats was built by Taylor Wimpey, but the freehold was subsequently sold and is now managed by E&M Limited.
Mr Crawford feels that the flats are becoming a huge liability for residents, and the ground rent has turned them into depreciating assets.
“I know the banks are wary of lending on properties with double ground rents. They become unsaleable and that is why I think the price has crashed and so many are being bought at auction.”
Information on property portal Rightmove and the Land Registry show that prices in the development dropped by around 30% between 2007 and 2016, with maisonette flats worth £109,000 in 2007 now on the market for £73,000.
A spokesperson for Taylor Wimpey says: “Similar to all major housebuilders, on developments where homes are sold on a leasehold basis, Taylor Wimpey has always sold its underlying freehold interests. This is because the administrative structures needed to manage a portfolio of freehold interests are very different to a housebuilder’s core business.
“Secondary customers and later purchasers are excluded from the Taylor Wimpey Ground Rent Review Assistance Scheme, which was set up in 2017 on a voluntary basis for our customers, as we have had no legal relationship with them, were not party to their property transaction and, as such, have no visibility of the information provided between the parties.”
Assured shorthold tenancy threshold
A discrepancy in the law also means that leaseholders are potentially at risk of losing their homes altogether if they are in arrears of three months’ ground rent.
This is because a long lease property with a ground rent of over £250 (over £1,000 in London) falls within the Housing Act 1988 and can be argued to be an Assured Shorthold Tenancy (AST).
In theory, a court can grant possession of the property to the freeholder if the leaseholder fails to pay the ground rent. And with the doubling ground rent clause, more properties are falling into the AST category.
The scenario has been described as a “ticking time bomb” by Anthony Matthews of Express Conveyancing, who says it is only a matter of time before people start losing their homes.
Mortgage lenders are also cautious about ASTs, particularly building society Nationwide, causing further problems for buyers and sellers.
What can leaseholders do?
Government pressure has seen developers implement voluntary initiatives such as the Ground Rent Review Assistance Scheme, launched by Taylor Wimpey. The housebuilder has allocated £130 million to help first-time buyers concerned about the saleability or mortgageability of their homes due to 10-year doubling ground rent clauses.
The free scheme means that instead of facing a doubling of ground rent, leaseholders pay an increase linked to RPI-inflation.
However, critics including the Bank of England and the Office for National Statistics, say RPI is not a good measure of inflation.
In many cases, the original developer has sold the freehold, so second-time buyers are unable to access the assistance scheme. Instead, their only option is to contact the freeholder directly to see if they can remove or convert the doubling ground rent clause or buy the freehold or a share of it as collective enfranchisement. But freeholders are “under no obligation to change the clause”, says Mrs Kleyman.
Another option is to bring a professional negligence claim against the conveyancing solicitor instructed to help with the property purchase. If the solicitor failed to give advice on the existence and implications of the onerous ground rent clause, leaseholders may be able to sue them for damages.
House sales fall through
Retired couple Helen, 66, and Steve Butcher, 62 (pictured above), are being forced to “raid their pension pot” to buy their freehold after their third house sale fell through.
When they bought their four-bedroom house in the Barratt Developments’ Woodlands estate near Chorley, Lancashire, in 2011, they thought they had 25 years before their ground rent increased.
But when they looked into buying the freehold three years later, they discovered the lease started in 2003. This meant their ground rent was due for an increase in line with RPI in 2028, rather than in 2036.
“We wanted to downsize and have been trying to sell it for over two years, but the ground rent review is now only nine years off. This week, the third buyer pulled out citing the lease,” explains Helen.
The ground rent is currently £250 a year, but when it is reviewed the property is likely to fall into the more tenuous position of becoming an Assured Shorthold Tenancy, making it even less saleable.
When they first bought the property, the couple claim that Barratt Development “assured” them that the freehold could be bought at a later date for £2,500.
But the freehold has since been sold to Aviva, which quoted £8,000 for the freehold and legal costs. This is more than the couple would pay in ground rent during their lifetime.
The house has also dropped in value by more than £10,000 and the Butchers feel trapped in a home that is no longer suitable.
“Under the terms of the lease, we can’t put a lift in and as we get older we may need to do this. We are stuck – it is a nightmare and really stressful.”
They feel their only option now is to raid their pension and buy the freehold.
A spokesperson for Barratt Developments says: “This lease has ground rents, which increase at 25-year intervals in line with RPI as is standard industry practice. Leasehold is a common form of tenure with millions of homes sold, and we do not believe there are any issues about the saleability of homes with this kind of lease.
“All leases on a development will start prior to the completion of the first house, in this case in 2003. This was clear on the lease document itself – our leases are specifically designed to be clear and transparent, and all customers have access to independent legal advice throughout the purchase process.”
Years ago I fumed at the thought of squatters, how dare they 'steal' somebody else's empty property for a period of time. I now think good luck, and will continue to do so until an alternative is provided for the lesser well off in this Country.
My daughter bought a flat 3 years ago and recently re mortgaged. This was flagged up by the solicitor then saying the mortgage company might have an issue with the ground rent.
Further to your article i have checked the lease and the ground rent doubles every 25 years and will be £7,200 by the end of the lease. This was never flagged up by the solicitor at the time of purchase.