Under-fire property developer buys back freehold as ground rent scandal bites
As a property owner with a sizeable portfolio, you may be aware of the recent uproar surrounding ground rents on leasehold properties. There’s one particular case – involving developer Countryside Properties and investor E&J Estates – that’s further propelled the issue into the spotlight.
Hailed a ‘breakthrough in the leasehold scandal’ by the Guardian, Countryside Properties recently agreed to buy back some of the freeholds it initially sold to E&J Estates, thereby relieving homeowners from clauses that led to ground rent doubling every 10 years.
With the news hitting the headlines, E&J Estates stated that it has “resolved not to purchase any further leasehold houses.”
Another article from the Guardian – which has been at the forefront of publicising the ‘scandal,’ – explains that in the past, homeowners were charged a pittance for ground rent, often as little as £1 a year. Though, things started changing earlier this century when developers began adding clauses to leasehold contracts which set the ground rent at £200-£400 per year, doubling every decade.
A buyer of a secondhand, ground-floor conversion flat in East London contacted the Guardian upon finding out how much his ground rent would vault up in future. He purchased the flat two years ago with the ground rent set in 2004 at £250 per year. Due to the double-rent clause, the final ten years of the lease would reach staggering £128,000 a year.
Buyers can request to buy out the freehold; however – such as in the aforementioned case where the flat owner was quoted over £100,000 – many homeowners simply can’t afford to do that.
The issue is far-reaching, with claims that around 100,000 homeowners are ‘trapped’ in properties that are ‘unsellable’ – as potential buyers are put off due to the spiralling ground rent charges.
The Countryside case will undoubtedly put pressure on other developers to provide compensation to householders plagued by skyrocketing fees.
Government sets out leasehold proposals
At the end of July, the government initiated a consultation on Tackling Unfair Practices in Leasehold Markets, which will run for eight weeks. Secretary of state for communities and local government, Sajid Javid, explained how the government wishes to end ‘feudal practices’ in the housing market.
Your Money sets out key findings and considerations included within the consultation document, which are as follows:
Leasehold on the rise
In 2015, Land Registry figures showed that leasehold accounted for 43% of all new-build registrations in England and Wales; a notable increase from the 22% recorded in 1996. More leasehold new-builds are being sold in areas where they had not been prevalent before, with regions in Cheshire, Greater Manchester, Merseyside and Lancashire highlighted as key problem areas.
In some instances, new builds have no shared facilities or services, so it is unclear as to why the properties are sold as a leasehold in the first place.
Buyers unsure of implications
The government states that in instances whereby leasehold and freehold purchases are both offered for a new build, buyers may not be receiving enough guidance on the differing costs and benefits of each option.
Equally as unclear is whether the leasehold discount is always passed onto the homebuyer. Even if they do receive a discount, it is unlikely to counterweight the costs the buyer may face in the long term.
Restricted Help to Buy access
The government aims to withdraw any Help to Buy equity loan support on new builds if there isn’t ‘good reason’ for it to be a leasehold. In instances where the leasehold is justified, ‘reasonable’ ground rent terms would need to be agreed.
An increase in house prices?
Both developers and landowners have stated that limiting their ability to sell freehold interests could force them to raise house prices, which they believe would also limit choice. However, the government has denounced such arguments and has invited opinions on the potential effect of restricting leasehold, as well as the measures to be implemented to curtail the impact on the current development pipeline.
Reducing ground rents
As current leasehold law does not cap the level of new-build ground rent payable, the government expressed it wishes to limit ground rents and make sure they start and stay at a near-zero financial level. At the same time, the government has asked for views on steps to be taken to better the situation for current leaseholders.
As the paper states, the consultation will close 19th September 2017 and the results will be published shortly afterwards. Hopefully, this will lead to greater transparency and fairness in the housing market for everyone involved.
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