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What's going on with the leasehold scandal?

  1. 01 October 2018
  2. By Rosie Rogers

Confusing leases, freehold being sold on to private companies and the consumer unaware until it's too late - what's the next stage in the leasehold scandal?

The leasehold scandal has been back in the headlines of late, with a damning report from NAEA Propertymark revealing that tens of thousands of new-build leasehold homeowners now regret their purchase and feel they were sold the home on false grounds.

In a survey of more than 1,000 people living in new leasehold homes, some 94% said they wished they'd never bought a leasehold, while two-thirds of homeowners felt they were mis-sold.

Almost half said they didn't know they were only purchasing the lease until it was too late, while 57% didn't know what being a leaseholder meant until after they had bought their home. Meanwhile, 15% said they weren't told by a professional that they were only buying leasehold – they had to discover this off their own back by studying the contract themselves.

Additionally, nearly half of those surveyed were oblivious to escalating ground rents until it was too late, with many now stuck in homes they can't shift because of the onerous terms in the lease.

Freehold and leasehold – what's the difference?

A freehold home means you own the building and the land it sits on outright. This means you don't have to pay any service charges or ground rent, or ask for permission to make alterations to your home. You are, though, wholly responsible for the maintenance and upkeep of the property, both inside and out.

By contrast, a leasehold home means you only own the lease from the freeholder (sometimes called the landlord) for a set period of time. This is usually between 99 to 120 years, but can be much shorter (40 years) or much longer (999 years in some cases).

You have to pay an annual service charge for the upkeep of the building and communal areas, as well as annual ground rent, maintenance fees and your share of the buildings insurance. You will have to secure permission from your freeholder for cosmetic changes to the outside of your property and any major renovations.

Typically, houses are freehold while flats and apartments (which often have shared spaces and communal gardens) are leasehold, but there has been a growing movement in recent years to sell new-build homes as leasehold – which is part of the reason for the recent uproar.

An ongoing issue

The leasehold scandal originally hit the headlines last year when it emerged that developers had been selling leasehold homes with spiralling ground rents and significant fees attached, which left many homeowners stuck in homes they couldn't sell and couldn't afford to live in.

With approximately 1.4 million leasehold homes in the UK, it was a major issue which caused quite a storm and propelled the government into action. It announced plans to tackle 'unfair and abusive' practices within the leasehold system. These included a ban on nearly all new-build leasehold homes, ground rent on new long lease property being set at zero and proposals to make it simpler and cheaper for existing leaseholders to purchase the freehold on their home at reasonable rates.

This followed a government consultation in 2017 on how to deal with unfair practices in the leasehold market. The government's response was issued in December 2017, but there's been little concrete movement since, with no timetable for when specific measures will be introduced.

Now the Law Commission has stepped in, with plans for 'radical' reforms for leaseholders of houses and flats. It outlined proposals to offer leaseholders the right to buy unlimited longer lease extensions without ground rent, as well as making the right to purchase either a freehold or the lease extension ‘easier, cheaper and quicker’.

The Commission's proposals also included removing the requirement that leaseholders must have owned the lease of their property for two years before making a claim; providing government with options to reduce the price payable by leaseholders to buy their freehold or extend their lease, while providing sufficient compensation for landlords; and creating a single simplified procedure for leaseholders to buy their freehold or extend their lease, thereby minimising disputes and preventing leaseholders falling into legal traps.

It was one of many recommendations put forward by the Commission, which also launched a consultation on its proposals (set to close on November 20).

Mark Hayward, NAEA Propertymark chief executive, welcomed the plans and consultation:
“Thousands of homeowners are stuck in leases across the country facing escalating ground rent, charges for making basic alterations and growing more concerned that their homes are unsellable,” he said.

“Helping those who feel trapped by their situation is a real challenge and we hope this process will result in a robust solution for all those affected and who are unable to sell their homes.”

Where are leasehold houses most prevalent?

According to data from the Office for National Statistics and Land Registry, London witnessed a 13.1% rise in the number of new-build houses sold as leasehold between 2012 and 2017, closely followed by the North West with a 12.8% increase.

There have been numerous news stories about people – often families – stuck in a leasehold nightmare, with escalating ground rents and a home they can't sell. What's more, young first-time buyers – often encouraged by various home-buying schemes to purchase homes that are leasehold – have been more affected by the scandal than most, with their dream first property turning into something much less than that.

While the government talked the talk last year on solving the issue, it's so far yet to back this up with any action. At present, the Housing, Communities and Local Government Select Committee is carrying out an inquiry into the UK government's leasehold reform programme – but with Brexit currently proving such a distraction, all other issues seem to be taking a backseat.

What can be done now?

For those already entangled in a difficult lease, waiting to see if the government accepts the recommendations from the Law Commission or outlines a timetable for the measures it proposed in December 2017 isn't really an option. So what can you do?

If you have a lease which contains a rent-escalation clause – allowing ground rents to be increased, sometimes by double, every 10 years – you are likely to find it much more difficult to sell. It could be worth your while trying to buy the freehold before the doubling ground rent applies, albeit this is easier said than done.

Despite freeholders being legally obliged to offer you the chance to buy the freehold of your leasehold home, there have been examples of developers selling the freehold to investors within two years under the noses of homeowners.

If your leasehold has a doubling ground-rent clause, you can also contact your developer regarding a Deed of Variation – to help get the clause removed or amended. Changing a Deed of Variation will prove easier if you were the first occupants of the home, purchased it from the developer on-plan or off-plan, and the developer is still the freeholder. Even if the developer is no longer the freeholder, if you bought the home from the developer and were the first occupants of the new-build your chances of amending the clause will be greater.

There's a good chance you're not alone in having a doubling ground-rent clause if you happen to live in a new-build development. It’s likely your fellow residents have been sold a home in the same way. If this is the case, you could contact your management company, Residents' Association or the Leasehold Advisory Service for assistance in contacting your developer in the correct way, or look to arrange collective action with other leaseholders in a similar situation to you.

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