A recent government announcement could mean a total ban on the sale of new-build homes under leasehold, as opposed to freehold terms. Graham Ireland explains how this could end the exploitation of new buyers.
What does leasehold mean?
Historically, there have been two basis of ownership. A freehold property generally means that the buyer owns the property and the land on which it is built.
However, a large number of properties are leasehold, which means that the land is retained by the seller – the freeholder – and the buyer purchases what is literally on the ground – the bricks and mortar. In this situation, the buyer rents the ground on which the property is built under a lease and is subject to the terms and conditions contained in the lease.
Leases quite often contain covenants and conditions restricting what the house owner may or may not do whilst the property is in his ownership, such as requiring permission from the freeholder to carry out alterations or additions to the property such as building an extension or a conservatory.
What caused the current leasehold problem?
Older leases are traditionally for long periods, usually 999 years and are subject to a minimal annual ground rent payment of only a few pounds per year.
However, the picture has altered radically during the last 10 years or so when some builders realised that there is a separate value in freehold land and in some cases imposed high ground rents in excess of £200 per year, as well as provisions in the lease for the rent to double during the lease terms.
Why urgent action is needed
Even though buyers have often been assured that a long lease was actually as good as buying a freehold property, the lease terms have meant that the freeholder can increase the ground rent to unreasonable amounts. Government figures indicate some family houses could have an annual ground rent of £10,000 by 2060.
These unacceptable costs are not only unaffordable, but also mean properties are difficult to sell – in extreme cases buyers are effectively trapped in their property because selling it is financially unfeasible.
Communities secretary Sajid Javid says he wants to put a stop to these ‘unjust’ and ‘unnecessary’ practices.
What the new proposals could mean
His proposals include a possible ban on the payment of ground rent on new build homes. They will be the subject of an eight-week consultation process that is intended to make leases fairer by lowering ground rents so they “relate to real costs incurred”.
Ideas being put forward include steps to close legal loopholes in a way that would protect leaseholders from possession orders. In addition, the proposals suggest a change to the rules on Help to Buy equity loans. This would stipulate that they could only be used to buy ‘new built houses on acceptable terms’.
While the current leasehold reform proposals are a very welcome development, the government is also being urged to help homeowners with existing unfair leases. Indeed, there is a compelling argument that action should be taken by Parliament to remove current unfair terms and unreasonable leases.
For further advice on leasehold and ground rent, call Graham Ireland on 01254 272640 or email him at email@example.com