Why have leasehold tenure and ground rents become a problem?

26.07.2017

Why have leasehold tenure and ground rents become a problem ?

The scandal of onerous increasing ground rents on leasehold properties has been many years in the making but has suddenly been cast into the spotlight by the recent ploys of housebuilders to sell new houses not as freehold but as leasehold, and to draw buyers into lease terms where the ground rent can vastly increase over time. The worst aspect of this is that most of the buyers unwittingly caught out here are younger inexperienced buyers who understandably haven’t realised the implications of what they are getting into. Worse still arguably is that they were not properly advised by their legal advisors. This may have occurred because buyers are often enticed by cheaper cut price legal firms where the work is done by clerks and just signed off by a qualified person, rather than all the conveyancing being the responsibility of a qualified solicitor. When we put sales together at Mervyn Smith its often a struggle to convince buyers and sellers to use a proper experienced local solicitor we recommend rather than some high volume cheaper factory firm.

What’s the difference between freehold and leasehold?

Essentially when you buy a freehold house, you buy the house and the plot of land it stands on. When a house is leasehold, the buyer is only really a tenant with a very long term rental, with the ground the home is built on remaining in the hands of the freeholder. The tenant therefore has to pay an annual “ground rent” to the freeholder, and also has to ask the freeholder for consent if they want to make any changes to the property, such as knocking down walls or changing the windows.

Why have ground rents  become such a problem?

In the past, leasehold property owners were generally charged a very small token ground rent known as a “peppercorn” ground rent. Sometimes it was so low many freeholders didn’t even bother to collect it. But in recent decades higher ground rents have become the norm and often with a more escalating structure so the rent increases over time. The escalation can be quite extreme in some cases, and some leases have related increases in ground rent to the rate of inflation or the market value of the property, which obviously leaves a leaseholder vulnerable to a sudden massive increase in their ground rent. It is now estimated that as many as 100,000 homebuyers may be trapped in contracts with spiraling ground rents. There are many more people of course in leasehold flats, many of which also have increasing ground rents. When we are involved in lease extensions, freeholders will typically offer a new or extended lease with a higher ground rent than the old lease. Usually we will advise leaseholders instead to go down the statutory route under the 1993 Act which is a more drawn out process but the leaseholder will end up with a longer lease and less ground rent. The whole issue of leasehold flats and lease extensions which affect a lot of property in our area is one we will return to in more detail in a forthcoming blog here.

Suffice to say for now that the cost of a lease extension under the 1993 Act is a function of the current market value of a property with a longer lease and the loss to the freeholder in losing their future ground rent. So if a housebuilder has sneaked in a lease with an escalating ground rent, it becomes more expensive for the owner to extend the lease or buy the freehold.

What is the government doing?

It has proposed a ban on the future sale of houses as leasehold, as well as cutting ground rents to zero. But serious questions remain about the future of people in existing contracts and the question of compensation. And in our area there is the much wider question of leasehold tenure of flats and maisonettes.