The government will ban the sale of most new leasehold houses and will impose limits on ground rents on leasehold flats. What’s changing and will it address leasehold problems?
Q. What is the problem with leasehold houses?
A. Leasehold houses have been sold for years in many parts of the north of England. Leasehold houses are especially common in Cheshire, Greater Manchester, Merseyside and Lancashire).
What’s happened over the last few years is that more developers have been choosing to sell new-build houses on a leasehold basis. However, there seems to be no justifiable reason for this.
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 aren’t always explained clearly. The ground rent is an annual charge you pay to the landlord who owns the building.
Solicitors don’t seem to be doing their jobs properly in all cases. They should be alerting buyers to the disadvantages of buying a leasehold house. This is especially important if there are clauses in the lease where the ground rent rises sharply after a number of years – or rises annually.
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). In that case, the landlord can evict you from your leasehold house if you’re in arrears with your ground rent. 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. Sometimes they do this without telling the house owners. The leaseholders 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. This is called the right of first refusal. Only if you’ve turned down the chance to buy the freehold can the freeholder sell it to anyone else. But this right of first refusal doesn’t apply to leasehold houses.
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. The real issue is that you may have to ask the freeholder’s permission before you alter the house or sell it. And you may have to pay them to get this permission.
- You may also have to repair the house 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.
SAVVY TIP: 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. What that means is that developers are pricing houses as if they were freehold, but selling them on a leasehold basis.
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 will ban the sale of new leasehold houses, except in certain circumstances. However, it first proposed this ban in July 2017 and it’s still not law.
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 will also:
- make the process of buying out the freehold or extending a lease much easier, faster and cheaper
- making leaseholders aware of how they can challenge unfair service charges etc
- making sure people who own their home on a freehold basis have the same rights as leaseholders to challenge unfair service charges
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. It also doesn’t help people who live in leasehold flats where the managing agents or freeholder is a rogue. Although leasehold flat owners have much better rights than they used to, it can still be financially wearing and time consuming to take on a landlord or managing agent who’s determined to make your life a misery.
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).
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