A need to outlaw greedy developer practice of selling house leases ASAP

We learned this week that first-time buyers in the U.K. are stressed out about the cost of buying a home. It is, after all, one of life’s big deals, and it can turn into a nightmare, more so it would seem if you buy a new home with a leasehold.

The scandal of developers selling on leases to finance companies which then charge home owners escalating fees for ground rent and also to do very basic alterations such as changing the flooring, has been reported by Property Wire and in other news outlets.

While traditionally leasehold applied to flats, it was introduced by developers as the current new home building boom got underway on new houses. Owners, many of them first-time buyers, found that the ground rent was administered by a company.

Although they could technically buy the lease the price was onerous, especially when they had spent all their savings on buying the home in the first place. Indeed, one ground rent management company charged GBP 108 to residents for simply enquiring about buying the freehold or making improvements to a property.

Depending on what works are being requested, home owners have found themselves being billed for GBP 300 for changing carpets or laying laminate flooring, or GBP 1,440 plus an unspecified landlord’s fee to build an extension.

Now, the British government has confirmed it will ban this practice and ground rents could be set as low as zero. Communities Secretary Sajid Javid said that the plan is to put a cap on leasehold fees and a crackdown on leasehold properties that qualify for the government’s flagship ‘Help to Buy’ schemes.

While some developers have voluntarily stopped the practice of selling leaseholds to private companies, others have not and Javid said he was now making sure that all would be equal.

“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,” Javid said.

Data from the Department of Communities and Local Government (DCLG) shows that there were four million residential leasehold properties in England in 2014/2015 and of these 1.2 million were houses. Currently, it is estimated that tens of thousands of home owners have been caught in the spiralling ground rents scandal and in some cases owners have homes that are virtually unsaleable. Javid cited one family home where the ground rent is expected to hit GBP 10,000 a year by 2060.

There will now be a short eight week consultation but the new law is unlikely to be in place until the beginning of next year, so while this is good news for those buying next year, what about those buying in the meantime and those who are now subject to these drastic leases?

Existing leaseholders are still facing rising ground rents and potentially unsellable properties as who is going to want to buy a home with this arrangement now that the problems have been highlighted.

Hopefully some more detail will come out after the consultation, including how the plan is going to help existing leaseholders. Hopefully it will mean that current leases can be changed but I suspect that the owners of these leases will want some kind of compensation for loss of future rent.

It should be remembered that long leaseholds were and still are an efficient way of managing apartment blocks and managed estates. The ground rent payable was always intended to be an inconsequential amount for the tenant, which underpinned the security of payment and, together with the service charge, effectively covered the freeholder’s management costs.

What has happened is that greedy house builders saw it as an attractive opportunity to make additional profit at the end of the development period by selling on the freehold interest, subject to the ground rent income. It is right that this should stop, so all I can say is get a move on with it.