Jul

Excessive leasehold charges on new-build homes to be banned…

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Problems with Long-leasehold:

The Conservatives have said that they have plans to ban the “feudal” practice of builders selling houses on long leases with excessive charges.

Leasehold is a form of time limited ownership which gives the freeholder the right to charge an annual ground rent. Whereas leasehold is a necessary provision in the case of flats and apartment blocks, individual houses do not necessarily need this encumbrance; something that some building companies have been taking advantage of to charge unsuspecting buyers exorbitant ground rents and fees.

Sajid Javid, the Communities Secretary, is to rush through changes that will result in a ban on all new-build houses being sold as a leaseholds with high charges, in a bid to stop the this exploitation of home buyers.

The consultation on the ban, which could be in place in as little as 8 weeks’ time, does not propose reforms to address reforms for existing leaseholders, however, it will address this issue as well, and will ask what measures could be considered.

Javid (pictured) will pledge a crackdown on unfair annual ground rents and has outlined measures to restrict the payments on new leases on almost all newly built homes in England to “peppercorn” or near zero rates.

The review will also consider what can be done to help millions of existing leaseholders who face onerous annual payments.

Mr Javid, who has previously described the English leasehold system as “practically feudal” has said:

“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.

“Our proposed changes will help make sure leasehold works in the best interests of homebuyers.”

Leasehold arrangements are primarily used for blocks of flats and apartments where a landlord or property manager is a necessity. However, it is being increasingly used by developers of new-build single houses, retaining a guaranteed future income stream that an annual ground rent charge provides.

But following recent horror stories where young couples have bought properties with charges doubling every 10 years, there are concerns that landlords are fleecing families and making their properties almost impossible to sell. One recent case involved a single house where the ground rent would reach £10,000 a year by 2060.

In theory, the original conveyancing solicitors is at fault, but it has been estimated that 70% of new-build leasehold home buyers (often first time buyers) used the conveyancing solicitor recommended by the developer. These buyers, young and never having bought a home before, say they have not had these risks brought to their attention. It is possible that some of the conveyancers could face legal claims, being accused of conflicts of interest and failing to warn buyers of the danger.

Buying any property with a lease, be it a single house or a flat, needs a dose of due diligence on the part of the buyer and his or her solicitor. Leases can have onerous clauses and restrictions, leading not only to high ground rents and service charges, but restrictions on uses, subletting and alterations. The length of the lease is important for mortgage and selling purposes as too short a lease means that finance will be unobtainable.

Failing to make payments such as ground rents and service charges can have serious consequences for the leaseholder as ultimately the freeholder (landlord) can bring a valid case against the leaseholder, for which he will be charged legal costs, and ultimately the freeholder can be really heavy-handed and forfeit the owner’s lease.

A leaseholder is effectively a tenant, beholden to the rules and regulations set by the freeholder who owns the building and the ground it sits on. Even if the leaseholder has a share of freehold, there is often a group or owner’s committee that makes all the decisions: this can result in difficulties when a leaseholder wants to make changes, sub-let or when the lease is sold.

Buy-to-let investors should really scrutinise the head lease granted by the freeholder to make sure that sub-letting is allowed and that permission will be given. For leasehold flat owners, the fees charged by freeholders (ground rents and service charges) are often a source of ongoing argument and discontent and buyers should make sure there are no serious disputes in train.

A sub-letting licence is usually required for those buy-to-let owners who are renting out their leasehold properties. However, despite a Land Tribunal ruling in 2013 that the fee should be no more than £40 plus VAT, some agents report freeholders charging several hundred pounds.

Service charges are another expense that landlords need to be aware of and budget for. Standard annual charges may be no more than a few hundred pounds for management, cleaning and groundwork etc, but exceptional charges for major repairs and maintenance could be in the thousands.

Landlords of leasehold flats seriously need to know what is in the lease, or some nasty surprises may await, as flat owners in Canary Wharf know all too well.

Insurance is another issue leaseholders need to be aware of. The freeholder’s cover is usually for the structure of the building, and leaseholders are responsible for insuring contents and public liability. However, it’s not always that straightforward, so all the lease, management contract and the insurance documents should be thoroughly checked.

Freehold, Shared Freehold and Leasehold

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