The leasehold scandal – what’s really going on? 

November 1, 2017

…asks Clarke Mairs partner and property law specialist, Katy Rushworth

Whether you have a leasehold property or not, you can’t have failed to notice the recent furore regarding leasehold homes. The storm has not gone unnoticed by Parliament either, with MPs keen to make major changes and have recently consulted on the issue.

But what’s really the problem?

The ‘leasehold scandal’ isn’t really about leasehold verses freehold. It’s about developers abusing the leasehold system for greater profits. New houses and developments that could be freehold are being sold on a leasehold basis, often imposing excessive ground rents so that the freehold can be sold off for an additional profit.

In 1967 and 1993, Parliament acted to protect tenants by giving them various rights to buy the freehold of their house or block of flats, or to extend their lease. While this all costs money that many struggle to afford (an issue to be addressed in itself), the protection is there for tenants to ensure their leases don’t run out.

The scandal is actually about a new problem: in the last 10 years or so, homebuilders saw the opportunity to make more money out of developments and many started selling more properties on a leasehold basis and then separately selling the freehold to investment companies. While the leases sold tend to be longer than previously (125 years or 999 years), the ground rent is much higher (typically upwards of £150 per year) and doubles at set intervals, for example every 10 years. If a ground rent starts at £150 per annum and doubles every 10 years, it can quickly reach astronomical figures.

The long-term issue of paying annual sums at that level are obvious but for most, the ground rent won’t reach that level in their lifetime. The short-term problem is that these properties are virtually unsellable with mortgage companies refusing to lend.

The cost to extend a lease of a flat, or to buy the freehold, is calculated by reference to the amount of ground rent the landlord would expect to receive over the term of the lease. Where the ground rent reaches an annual sum of hundreds of thousands of pounds you get freehold or lease extension prices in the millions. Buying the freehold to get rid of the unreasonable terms in the original lease is therefore entirely unaffordable.

Nationwide Building Society were the first lender to take major action, refusing to grant a mortgage on new built properties where the lease of a flat is below 125 years or 250 years for a house. It won‘t accept ground rents that double every 10 or 15 years, or where it starts at more than 0.1 per cent of the value of the property, and only accepts ones that increase in line with the Retail Prices Index (RPI).

In response, and presumably in anticipation of legislative involvement, we’ve seen Taylor Wimpey put together a fund reportedly worth £130 million to change the doubling ground rent in the leases they sold so that the ground rent is linked to RPI instead. While many say this doesn’t go far enough, it is a welcome move (and more than many developers have done!) and would certainly improve the position for home owners without costing them anything.

Much of the focus in the press has surrounded developers selling the freehold after completing the development but that’s not really the issue – the ground rents would still reach a level that was unaffordable and the lease would still include the same terms even if owned by the original developer.

Should we just abolish leasehold? In principle, there is nothing wrong with leasehold. Is it archaic? Yes, but it may be the most workable solution for managing estates of flats and houses where there are common areas. Is it absolutely necessary in residential property otherwise? Probably not and that is being looked at closely by the government.

Clarke Mairs

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