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Government announces plans to ban leaseholds on new-build homes in England

  1. 28 July 2017
  2. By Nick Perman

Plans to ban New-Build houses being sold as leasehold have been announced by the government, with proposed measures to clamp down on “unfair charges” levied on buyers.

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Under the new proposals, put forward by Communities Secretary Sajid Javid and subject to an eight-week public consultation, leaseholds on New-Build houses would be outlawed and ground rents could be drastically reduced or even scrapped completely. 

This follows years of calls from campaigners to end the practice of houses being sold as leaseholds, although there are still concerns that thousands of existing leaseholders don’t have enough protections against spiralling ground rents. 

Traditionally, houses have been sold as freehold while flats and apartments – especially those found in blocks – are leasehold. In recent years, however, there has been a growing trend for houses to be sold as leasehold, in particular new-build properties.

There are a number of important differences between the two. As a freeholder, a homeowner owns the home outright and the land it’s built on, forever. By contrast, leaseholders own their home for a fixed period of time, effectively leasing it from a freeholder or landlord. Once the lease expires, ownership of the home returns to the freeholder unless an extension is agreed. What’s more, leaseholders don’t own the land the home is built on or what surrounds it. So, for example, a leaseholder wouldn’t own the front or back garden or any space outside the four walls of their home. 

As such, leaseholders have to pay certain costs – including ground rent, service charges and admin fees – to the freeholder. This covers things like maintenance for communal areas, upkeep of communal garden space and repairs to outside walls/roofs. 

Ground rents, though, have come in for especially sharp criticism, with some housebuilders accused of doubling ground rents every decade as part of exploitative contracts. Ground rents – which are paid to the freeholder - can vary dramatically in price, from as low as £10 a year for ex-council housing to £300 a year for more modern flats. Generally speaking, ground rents are quite low – usually standing at around £50 per year – but this varies from lease to lease and is not set in stone. Ground rents can either be fixed or escalating, and in some cases there have been concerns that such rents are spiralling out of control and leaving homeowners with costs they can’t meet.

Furthermore, claims have been made that some homes are now virtually impossible to sell because of spiralling ground rents. Javid, in fact, cited one such example of a family home that is now “unsaleable” because the ground rent is expected to reach £10,000 a year by 2060. Other examples cited by the government, to highlight the issues with leasehold homes, included a homeowner being charged £1,500 by the freeholder to make a small change to their home, quotes of £35,000 or above for leases to be purchased on detached homes that are only a few years old, and one owner who was told buying the freehold would cost just £2,000 but was instead faced with a £40,000 bill. Additionally, some buyers are reported to be trapped in homes that are valued at zero just six years after they were built.

Now the government is determined to take action, with Javid saying: “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. Our proposed changes will help make sure leasehold works in the best interests of homebuyers now and in the future.”

The Department for Communities and Local Government (DCLG) will now consult on how existing leaseholders can be assisted, with tackling unreasonable increases in ground rents and giving greater powers to homeowners to challenge unfair charges both on the cards.

It’s a problem that affects a small, but not insignificant, part of the marketplace. According to government figures, 21% of private housing in England is leasehold, with 30% of these leasehold houses. The rest is made up by flats and apartments. That amounts to 1.2 million leasehold homes in England, with houses being sold as leaseholds at its most prominent in the North West. 

Campaigners, MPs and leading newspapers have all regularly pointed out the unfair practices at play and called for action to halt it, while it’s been described by some as a “national scandal” and “the PPI of the housebuilding industry”. 

As a result of the new measures the government wants to introduce, there would be a blanket ban on new-build homes being sold as leasehold while ground rents could be restricted to as low as zero. Steps will also be taken to close legal loopholes to protect buyers from “onerous charges”, with some homeowners reportedly facing repossession because of their inability to keep up with rapidly increasing ground rents. The government’s flagship Help to Buy equity loan scheme, too, will be amended to ensure that the initiative is only used to support new-build properties on acceptable terms. 

While flats can still be sold as leaseholds after the changes have been introduced, there will be pressure on the government to keep ground rents to a reasonable amount and to help existing leaseholders. It’s publicly said “enough is enough” and that the current exploitation of leaseholds by certain housebuilders is “unjust, unnecessary and needs to stop”. Strong words, then, but the government will need to back this up with decisive action or face the wrath of frustrated and angry campaigners.  

Buyers of new-build homes in the future are likely to benefit considerably from the proposed ban, with no need to pay a service charge, ground rent or other associated costs. However, more importantly, they’ll own the home outright with no worries about leases expiring or a home becoming near-worthless thanks to rising ground rents. For those who already own leasehold houses, the hope will be that something will be done to address their current situation. Javid said that those currently facing difficulties should seek redress from their housebuilder, or – if the leasehold situation was not made clear at the point of sale – their solicitor.

The prospect of ground rent being reduced to zero on leasehold flats will also be welcomed. While ground rents vary massively from lease to lease, for some they prove a big financial burden and the removal of this will bring with it plenty of relief. 

The government’s plans are subject to a public consultation, but there is seemingly widespread support for the banning of leasehold homes and controls on ground rents, so it would be surprising if the proposals were amended or stopped in any way. For campaigners and those who have been negatively affected by leasehold houses and high ground rents, this has been a long time coming. 
 
 

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