Real estate

What is the future for freehold properties?

Jessica Patel Jessica Patel

Under new proposals announced by the Communities Secretary, Sajid Javid on 25 July 2017, ground rents on new-build houses will be regulated in an attempt to curb questionable industry practices. 

Many homeowners are incurring additional ground rent charges due to the increased number of newly developed houses sold as leasehold rather than freehold.  

The Government is consulting1on proposals initiated by Mr Javid to ban the selling of leasehold (rather than freehold) interests in new houses, where there is no clear legal or commercial reason. Leasehold sales of flats will not be affected. Further restrictions will apply to the Help-to-Buy scheme, so that equity loans will not be granted unless lease terms are fair and acceptable for buyers.

Why are freehold properties disappearing?

The number of leasehold houses sold has risen significantly over the last few years. The Leasehold Knowledge Partnership reported that 8,775 leasehold houses were sold in 2015, more than double the 2010 figure of 3,4202. Leasehold interests are sold to homebuyers at the same price as a freehold interest, with the freehold either retained or sold to third-party institutional investors or ground rent businesses to generate additional revenues. Leasehold charges on flats are often justified because the common areas require upkeep by a landlord or freeholder, but it is less clear why houses would be sold on leasehold, unless they are built on land subject to restrictions (eg in cathedral precincts).

Traditionally, ground rents have been set at a peppercorn level or a small fraction of one percent of the original sale price, with increases linked to the retail prices index (RPI). It is now common for ground rents to start at material levels with lease terms providing for them to double every ten years.

If the ground rent began at £295pa and doubled every 10 years, it would be £9,440pa in 50 years’ time and £302,080pa after 100 years. Homeowners may also be subject to punitive charges in return for the freeholder’s permission to undertake works on their properties. Homeowners wishing to escape ever-increasing ground rent charges may struggle to buy the freehold and will find it increasingly difficult to sell their houses, with would-be buyers wary of taking on such onerous leases and many lenders refusing to offer mortgages on such properties.

Create a fairer and more collaborative environment leading to a vibrant economy

This situation is detrimental to a vibrant, dynamic economy and while increased consumer protection is welcome, queries abound over how far-reaching the proposals will be, particularly for holders of existing onerous leases. The current proposals do not extend to existing leases and while the government is keen to consider what it can do to improve the situation for such leaseholders, it is difficult to see what commercial and practical steps will be feasible with respect to current levels of ground rent. It is likely that any restrictions will apply only to future rent rises. Mr Javid's comments suggest that current leaseholders should seek redress directly from the developer or their solicitor, leaving many consumers disappointed, given the high upfront costs involved in engaging legal counsel.

A further concern is that the proposals apply only to England. Leases of residential property over 20 years in duration are extremely rare in Scotland, so homebuyers in Scotland have been largely protected from these practices because most homes are sold on a freehold basis. However, consumers in Wales and Northern Ireland continue to be exposed to current practices. It will be up to the respective devolved administrations to determine whether any action is taken.

How will this affect the industry?

Although developers and ground rent businesses will suffer from the new proposals, the industry is broadly behind the reforms. Recognising that businesses need to act responsibly, some house-builders have set aside money to help customers subject to onerous leases where the freehold has been sold to external investors3. The Government has welcomed these moves.

Despite the broadly positive reaction, developers will no doubt reconsider their cost strategies in order to maintain revenue flows. There are concerns that developers may seek to extract a higher value from properties at the point of sale, which will be unwelcome news to consumers. Equally, with an increasing number of leasehold properties (some with steep property management fees) the government may consider extending the scope of the proposals to review the costs surrounding leasehold flats as well. As ever with government initiatives, getting the detail right will be crucial to ensuring unintended consequences are minimised.

What are your thoughts on these proposals?

We welcome your opinions on these changes. If you would like to share your thoughts on how these reforms can encourage businesses to act responsibly and contribute to a vibrant economy, please get in touch with Jessica Patel.

Sources:

  1. Gov.UK - Tackling unfair practices in the leasehold market
  2. Leasehold Knowledge Partnership - Surge in new-build leasehold houses with £1.9 billion sold last year
  3. Financial Times - Taylor Wimpey sets aside £130m to cover ground rent disputes