The UK Government has taken the first step to ban the use of leaseholds on new build houses in England & Wales.
The Government has launched a consultation to tackle "unfair" charges that have been levied on home-owners who have leasehold, opposed to freehold titles.
The Communities Secretary set out plans to ban new-build houses being sold as leasehold as well as restricting ground rents to as low as zero.
The announcement will not be received well by major housebuilders, such as Taylor Wimpey, which utilise leaseholds on new build schemes throughout the UK. The UK Communities Secretary has claimed that housebuilders are using leasehold schemes "as an unjustifiable way to print money".
What is a leasehold title?
Under a leasehold title, the home owner is granted a long lease of their home, typically for a term of 150 years or longer. Under the lease, the owner is liable for ground rent charges and charges for maintenance of common areas.
Whilst almost all flats in the UK are sold on leasehold titles, there has been an increase in the number of houses being sold on leasehold, rather than on freehold, titles. On a large development, leases can be a useful means of regulating the appearance, maintenance and character of a development.
Agents and developers will often market long leases as "as good as freehold" but this is not strictly true. Also, leases usually carry additional charges that would not be payable under a freehold.
Can't the owner buy the freehold?
In short, yes, subject to meeting certain criteria.
For the right to buy to arise, the main conditions that must be satisfied are:
- The lease must be of a house
- The lease must be a long lease, which is a lease granted for a term of more than 21 years
- the rent payable must be a low rent (there is a statutory test)
- The tenant must have owned the house for at least the two years
So what's the problem?
The Government is seeking to prevent landlords from demanding unreasonable sums to sell the freehold to home owners. A recent investigation uncovered one landlord who was seeking £35,000 to sell the freehold in a property that was just a few years old.
Justin Madders, Labour MP for Ellesmere Port and Neston, has been reported as claiming that “what has occurred in this sector should be regarded as a national scandal".
Currently, there is a healthy market for the sale of ground rents. Speculative investors are buying up freehold sites from developers and seeking to make a profit on both the sale of freeholds to home owners and on charges for consents, such as for alterations.
Under a long lease, the home owner must usually seek consent from the landlord for carrying out alterations to the property. The landlord may charge a fee for dealing with the consent application.
What are the charges that could be banned or reduced?
The main charge is ground rent. This is often a modest sum at the outset of the term but, under some leases, the ground rents can double every decade, placing a financial burden on the owner and making the property less attractive to potential purchasers.
By way of example, it has been reported that some ground rents could rise to £10,000 per annum by 2060. Such a huge increase in rent can devalue properties to such an extent that they are effectively worthless.
How big is the problem?
Government statistics estimate there were 4m residential leasehold dwellings in England in the private sector in 2014/15 and of these 1.2m were leasehold houses.
The practice of selling houses as leasehold has been particularly prominent in the north-west of England.
I already have a leasehold property. Is it too late for me?
The Government is expected to consult on what it can do to support existing owners who are faced with onerous charges. It is possible that new measures could be introduced to place a cap on unreasonable ground rent rises, such as rents doubling every decade, and giving more powers to householders to fight unfair charges.
Alternatively if you have owned your leasehold house for over two years, you have the right to force your landlord to sell the freehold title of the Property to you under The Leasehold Reform Act 1967.
So, what's next?
Expect the Government to move fast on this issue. The consultation will last just eight weeks and, judging from the rhetoric from the Government, firm action will be taken to stamp out what the Government sees as unscrupulous practices by some housebuilders.