Government Consultation to Stop Leaseholds Being a Property Trap

Posted on September 15, 2017

There was a furore over the summer about developers making unfair charges on leasehold properties. The government is currently consulting on how to stop these practices. With the consultation due to end on 19 September, you only have days to give your views.

This article looks at the difference between owning your property as freehold or holding it as leasehold – and the effect that leasehold ownership could have on your finances.

The difference between freehold and leasehold

Those who own their property as freehold own the building itself and the land outright (subject, of course, to any mortgage that the owner may have taken on to assist with the costs of purchase).

“Leaseholders”, on the other hand, own their home for a fixed, often long, period of time only. They own the property “on lease” from the ultimate owner (the “freeholder”). The leaseholder pays a “ground rent” to the freeholder, normally on an annual basis.

How has this property trap arisen?

In recent years, the number of new-build houses sold as leasehold has been increasing. It is estimated that by 2016, over 14% of new build houses were sold on a leasehold basis*.

When buying a property, your solicitor will advise you about how you will own/hold the property. However some buyers may have bought a leasehold property without fully understanding the extent of the obligation to pay the ground rent.

In itself, this is no bad thing. Unfortunately, however, some builders and developers have increasingly been including terms in the leasehold that allow for the ground rents to increase dramatically. In some cases, ground rents have doubled every decade. Leaseholders then have to find the money to pay for these additional costs. Worse, the property becomes hard to sell because future buyers will not take on the onerous rents.

How is the government dealing with the problem of leaseholds?

In February 2017, the government issued its Housing White Paper ‘Fixing our broken housing market’ which highlighted its aim to improve consumer choice and fairness in the leasehold sector.

A few months later, in July 2017, the government launched a consultation: “Tackling unfair practices in the leasehold market”. Announcing a crackdown on unfair leasehold practices, Communities Secretary, Sajid Javid said:

“It’s 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. These practices are unjust, unnecessary and need to stop. Our proposed changes will help make sure leasehold works in the best interests of homebuyers now and in the future.”

The consultation: “considers a range of measures to tackle unfair and unreasonable abuses of leasehold; in particular the sale of new leasehold houses and onerous ground rents; and seeks views on excluding leaseholders from possession orders because of arrears of ground rent; and views on freeholders being able to challenge service charges for mixed tenure estates with shared facilities.”

The consultation also asks specific questions on:

“i) Prohibiting the sale of new leasehold houses (with possible exceptions where developers are obliged to sell a house on a leasehold basis);

ii) Possible changes to the Help to Buy scheme in relation to leasehold houses;

iii) Limiting the starting value and increase of ground rents on all new residential leases over 21 years;

iv) Updating Ground 8 of the Housing Act 1988 so long leases over 21 years with an annual ground rent over £1,000 in London and £250 outside of London cannot be an Assured Tenancy;

v) Providing freeholders on private estates with equivalent rights to leaseholders to challenge the reasonableness of service charges via the First-tier Tribunal (Property Chamber); and

vi) Areas for future leasehold reform.”

(See paragraph 1.7 of the consultation.)

You have until 19 September to give your views to the government. To do so, click here or email your response to the questions in this consultation to: leaseholdHousesConsultation@communities.gsi.gov.uk.

What can you do if you have been affected?

If you are currently buying property, be sure to listen to your solicitor’s advice about how you will hold the property. If it is leasehold, check what that will mean in the future.

If you are a leaseholder and subject to onerous and increasing ground rents, you may be able to seek recompense from:

the builder or developer; and/or
the solicitor/conveyancer who advised you on the purchase (who should have advised you of the effect of holding the property as a leaseholder).

Contact

To find out what legal action you can take, get in touch with Christopher Burke in our dispute resolution team.

If you have any queries on property law issues (purchases, sales, development work, conveyancing and landlord and tenant law), contact Karen Piontek on 0161 684 6951 or one of the team and we will be happy to talk through any issues you might have. Alternatively, you could make an enquiry.

*Sources

Government Press release
The consultation: Tackling unfair practices in the leasehold market.
The issues were widely reported on in the press and the national and local news. For example, here’s the BBC’s report.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.