The government plans to outlaw the sale of new leasehold houses

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It’s reckoned there are a million leasehold houses in England, but now the government plans to outlaw the sale of new leasehold houses. Will it solve the problem?

Q. What is the problem with leasehold houses?

A. Leasehold houses have been sold for years in many parts of the north of England (and it’s especially common in Cheshire, Greater Manchester, Merseyside and Lancashire).

What’s happened over the last few years is that more developers are choosing to sell new-build houses on a leasehold basis. The government says that some of these houses have no shared areas or facilities and there’s not always an obvious reason why they’ve been sold as leasehold rather than freehold.

SAVVY TIP: The big problem is that buyers aren’t always told what buying a leasehold house could mean and charges, such as ground rents (see below) aren’t always explained clearly.

Solicitors don’t seem to be doing their jobs properly in all cases, as they should be alerting buyers to the disadvantages of buying a leasehold house, and particularly to any clauses where the ground rent escalates.

SAVVY TIP: Did you know, that when the ground rent is more than £1,000 a year in London or £250 a year elsewhere, the lease becomes an assured tenancy (which is a type of rental agreement), and the landlord can – if you’re in arrears with your ground rent – evict you from your leasehold house. Not surprisingly, this is something most home buyers aren’t aware of.

The other big issue is that housebuilders are selling on the freeholds to third party companies – without telling the house owners. They then have to spend time and money (on legal and surveyor fees) if they want to buy the freehold and take control of their home.

SAVVY TIP: If you buy a leasehold flat, the freeholder has to offer the flat owners the freehold first (you have right of first refusal) before he or she can sell it to anyone else. But house developers are selling on the freeholds before the block has been completed, which means they can get round the law that says they must offer it to the leaseholders first

Q. What’s the difference between leasehold and freehold?

A. If you buy a freehold house, you own the building and the land it stands on. If you buy a leasehold house, you buy the right to live there for a period of time (the length of the lease). Once the lease runs out, the freeholder – otherwise called a landlord – owns it.

Leases can last for a long time. A lease that lasts for 99 or 125 years is not unusual and some last for 999 years. The problem isn’t so much that you won’t have the right to live in the property while you’re alive, more that you may have to ask the freeholder’s permission before you alter the house or sell it (and pay them to get this permission) and you may have to do maintain or repair it in line with conditions in the lease.

You also have to pay a ground rent to the freeholder. This can be a fairly low amount – say £100 – £200 a year. The problem is that some new build leasehold houses have clauses in them where the ground rent doubles every ten years.

Even a modest ground rent of £250 a year would work out at £8,000 a year after 50 years if it doubled every ten years. You might not plan on living in your house for 50 years, but if you wanted to sell it, someone else might have trouble getting a mortgage and other buyers may be put off.

Q. Why are more houses being sold on a leasehold basis?

A. My view (possibly an over simplified one!) is that house builders and developers are often being greedy. Their argument is that buyers (especially first time buyers) wouldn’t be able to afford the house if it was freehold. But the government’s report today says that this ‘leasehold discount’ isn’t always passed onto the buyer.

There are some situations where it’s probably justified to sell a new house on a leasehold basis, such as if it’s National Trust land, for example, where the National Trust wouldn’t want to lose control of the land.

Q. What is the government doing?

A. The government says it plans to clamp down on the sale of new leasehold houses. It’s issued an eight week consultation, which you can take part in. There are details on how to do this at the bottom of the article. Despite some of today’s headlines, the government has not banned the sale of leasehold houses, although it is looking at outlawing their sale unless it can be justified. However, it’s asked for feedback on whether this would cause problems for the housing market, so it’s not yet a done deal.

SAVVY TIP: The government says new houses would still be able to be sold on a leasehold basis if they were certain shared ownership houses, houses in a cathedral precinct and those on National Trust land.

The government is also thinking of:

  • Only allowing Help to Buy equity loans to be available on freehold houses, or – subject to the exceptions I’ve mentioned above – leasehold houses with a low ground rent.
  • Limiting the amount that a freeholder can charge in ground rent.
  • Changing the law so that where a leaseholder pays more than £1,000 in ground rent in London or £250 elsewhere, their lease isn’t classed as an assured tenancy.
  • Allowing people who own leasehold houses to be able to challenge charges they’re asked to pay for things like communal areas. At the moment, if you own a leasehold flat you can do this, but you can’t with a leasehold house.

Q. Is the government doing enough?

A. No, I don’t think it is. Although today’s announcement is very welcome, it does nothing to help those people who have already bought leasehold houses.

I think the government should force housebuilders to offer compensation to leaseholders, especially those who’ve bought properties that have an escalating ground rent clause. They should also take action against those housebuilders that sold the freeholds onto a third party.

Taylor Wimpey has offered some compensation (although a quick bit of online research will show it’s been criticised by a number of groups for not being enough).

Useful links:

You can read the government’s consultation on the Gov.uk website and you can reply using this link to its surveymonkey feedback form.

Related articles:

If you live in a leasehold flat, you can take control of your block through ‘right to manage’

Buying a leasehold flat; what you need to know about owning a leasehold flat

Living in a leasehold flat: what can you do about high service charges?

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