When you buy a home, it will either be freehold or leasehold.
In the past, it was mainly flats that were sold as leaseholds. However, this is not the case anymore. Alongside this, leasehold properties have received a lot of negative press recently.
But why is this? What are the reasons for the leasehold scandal? Let’s dig a little deeper…
What is a leasehold property?
A leasehold house is one where the owner owns a lease alone – not the building or the land it sits on. This means buyers don’t have complete control over their property.
Essentially, the leasehold meaning is that buyers are on a long-term rental contract or tenancy. They can’t make any major structural changes to their homes, such as building a conservatory, without the freeholder’s consent.
Leaseholds are unique to England and Wales. In Scotland, instead, they have commonhold properties, designed to help buyers get full ownership.
What is ground rent?
Ground rent is an annual amount the homeowner has to pay to the freeholder after buying a leasehold house.
There are different types, including:
• Doubling ground rent every 10 years (considered a burden by some homeowners)
• Doubling ground rent every 25 years
• Linked to inflation
The ground rent scandal
To fully understand the leasehold scandal, you first need to understand the issues with ground rent – as the two go hand in hand.
In some cases, developers insert clauses into contracts that doubles the ground rent, for example every 10 years. Some homeowners don’t find out about this until it’s too late.
It used to be that ground rent was an extremely small amount. But, more recently, it appears this has gone out of control.
Spiralling ground rents can now cost homeowners hundreds a year, caused largely by doubling clauses.
Depending on the size of the property, it’s predicted some homeowners could end up paying thousands in a few years’ time.
Extra costs in the leasehold system
Escalating ground rent isn’t the only issue facing those who own leasehold homes. They’re also being hit by other unforeseen costs, such as services charges for issues concerning the freeholder – even answering letters.
For issues such as building a conservatory, homeowners can be asked to pay the freeholder thousands, on top of the cost of getting planning permission.
Many homeowners claim they have no idea about these charges until after they’ve purchased their home.
The impact on first-time buyers
First-time buyers in particular have been caught out by homes mis-sold as ‘virtually freehold’, when in fact there are clauses concerning ground rent they didn’t know about. Most leasehold sales are to buyers who have never owned a property before.
New buyers are the most inexperienced in the property market, and so sometimes fail to ask the right questions. Estate agents always act on behalf of the seller, so they look out for their interests first and foremost.
Also, estate agents aren’t legally obliged to volunteer information, therefore do not raise the issue unless prompted.
As well as this, some government-backed home buying schemes that are popular with new buyers, such as Shared Ownership, have been received negative impact as a result this is because properties bought through this scheme are sometimes leasehold.
It’s expensive to run a home as it is, and high ground rent charges can add further complications.
It seems young and unpractised buyers are particularly susceptible to buying a home they will never fully own.
Leasehold house problems
You might be wondering why those who own these type of homes don’t just move. But, due to these problems, leasehold properties can become extremely difficult to sell.
There are a number of reasons for this, including:
Difficulties getting a mortgage
Some banks won’t grant mortgages for leasehold properties. These currently include:
• Virgin Money
The majority of us need a mortgage to buy a home. Therefore, those who own a leasehold property can struggle to find anyone in a position to buy.
If they are eventually sold, it is often for a discount, under the initial asking price.
The result? A serious devaluation of many homes across the country.
Conveyancing solicitor warnings
Many conveyancing solicitors warn buyers not to invest in leasehold houses, putting prospective buyers off.
For some homeowners, this can make them feel trapped – unable to sell, and unable to keep up with ground rent payments.
Difficulties buying the freehold of a leasehold house
There is always the option to buy the land outright from the freeholder. However, this can be easier said than done.
Many homeowners aren’t in the position to afford the cost of the freehold. In some cases, this may have increased dramatically in price since the home was initially purchased.
With the increases in ground rent, it’s easy to see why freeholders will charge so much for the land on which the property sits. Homeowners are essentially put in a position where buying out the ground rent is their only option.
How many people are affected?
Most properties are freehold, however this doesn’t mean only a small number of people have been impacted negatively by spiralling ground rent.
Leasehold Knowledge Partnership predicted in 2017 that 100,000 homeowners have been trapped by the problems. This number is likely to have risen since.
Outside of this, most flats and apartments are leasehold, giving you an insight into the scale of the issue. However, those who own a flat are usually aware of this before they part with their money.
Leaseholds houses are more common in north-west England. In 2017, 32% of properties in this area were sold as leasehold.
The issue with new build homes
Most homeowners who are now finding themselves trapped live in new build properties.
New build leasehold houses have become more and more common. However, buyers are often unaware that they don’t own the land until it’s too late. Unsurprisingly, this information is often left out of sales pitches.
Usually, a conveyancing solicitor will warn buyers of the leasehold. But, in some cases, prospective homeowners have used solicitors recommended by the property developer – who have then failed to disclose the vital information about the new build leasehold.
New builds are sold to first-time buyers as a way to get on the property ladder. However, many are unaware of the potential pitfalls.
What are communities and local governments doing to help?
Is there a solution out there?
Many communities have been in uproar over the issue, demanding reforms and claiming change needs to happen quickly.
To some, the leasehold scandal is one of the biggest financial crises in recent history. However, it appears that changes need to be made from the top.
To ensure homeowners aren’t left out of pocket, the government needs to take action.
Are the government working to resolve the issue?
It appears change is happening, albeit slowly.
In 2017, new measures were announced to crackdown on unfair leases. This included a ban on leaseholds for most new build homes.
It was also stated that ground rent for long leases, on houses and flats, would be set to zero. At this time, there were 1.4 million leasehold homes in England, with this number rising rapidly.
The government has also stated it wants to see more redress schemes. For example, Taylor Wimpey pledged £130 million to help those trapped by ground rent clauses, offering to convert these controversial leases. It was promised homeowners would be switched to more convenient contracts.
For many, these reforms felt long overdue!
However, there’s still a question mark over whether there’s a resolution for those who already own a leasehold property.
Should I buy a leasehold house?
Unsurprisingly, due to the scandal, many prospective buyers are put off buying a leasehold property.
But, for some, it can feel as though a leasehold is their only option. Also, it’s important to remember that not every homeowner of a leasehold property has experienced the problems discussed earlier.
But, before purchasing a leasehold, think carefully. Here’s some advice:
• Get good independent legal advice
• Avoid any informal arrangements with the freeholder – you will be outside of legal protection
• Ensure you ask the estate agent or developer plenty of questions concerning the length of the lease and ground rent charges
• Consider whether buying the freehold will be possible
• Consider buying the freehold as part of a group
• Understand the ground rent charges fully – if it doubles every 10 years, perhaps reconsider buying the property
Get a reliable conveyancing solicitor
Evidently, some buyers have not received the best advice from their appointed solicitor. It’s vital you quickly establish the legal tenure of the property.
How? Ensure you instruct a conveyancing solicitor you can trust. You need someone to take care of your legal matters when buying a home, one who works for you.
We can connect you with highly experienced independent legal advisers – let us know what you need and we’ll put you in touch straight away.