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leasehold reform

The lowdown on Leasehold Reform

If you’re considering buying a new home, particularly a new build property, you may have come across ‘leasehold property’ for sale on new developments. There has been quite a lot of bad publicity about leasehold property. You may also have read recent reports that Communities Secretary Sajid Javid has announced a programme of leasehold reform. Time to give you the lowdown on leasehold and leasehold reform – what the problems are and how the government’s proposals will tackle the exploitation of this form of home ownership.

What is a ‘leasehold’?

Leasehold is a form of property ownership that’s been around for many years. Unlike ‘freehold’ which essentially means that you own your property outright, a ‘leasehold’ property is not owned outright. Someone else – an individual or a company, will own the freehold, and will sell a ‘leasehold’ interest in the property. This can be for as many as 999 years.

Once you have bought the leasehold, you will usually have to pay an annual ‘ground rent’ – although this is often fixed at a nominal sum of £1 (also known as a ‘peppercorn rent’) which many landlords – the owners of the freehold – will not collect. A leasehold property is usually cheaper than an equivalent freehold property, which is a key part of the attraction of a leasehold property. In many developments, such as flats, where there are communal areas that need to be maintained, a leasehold arrangement can make sense as the freeholder takes overall charge of the upkeep of the property. Ground rent and service charges contribute to that upkeep.

All very straightforward, you might think. With a lease for 999 years, even someone who has lived in a property for 50 years before thinking of moving on will have 949 years of a lease to sell on – and so it continues. So why, you might ask, do we need leasehold reform?

The case for leasehold reform

Over the last couple of decades, something nasty happened in the property development industry. Unscrupulous developers started to take advantage of leasehold tenure of new build properties, imposing onerous conditions in the terms of the lease. The result is that even leases with hundreds of years to run have become impossible to sell on. The problems have arisen in a number of ways:

  • Option to buy the freehold

Some developers sell new build properties – but not the land they are built on. Offering a long lease, the developers claim the property is ‘virtually freehold’ and include a ‘first refusal’ to buy the freehold for a reasonable rate 2 years later. In the meantime, the freehold is sold to a third party and the ‘reasonable rate’ becomes thousands – in some cases, the initial quoted rate of £2,000 became £40,000 at the time the freehold was offered for sale.

  • Doubling ground rent

Ground rent – which we mentioned above – has become a real money spinner for unscrupulous property developers. The small print of the leasehold agreement will include a clause that allow them to double the ground rent at regular intervals. With a doubling clause applying every 10 years, a ground rent of £250 a year quickly becomes £2,000 a year – a far less attractive prospect for a potential buyer.

  • Paying for permission

Under most leasehold agreements, the owner of the leasehold must apply to the freehold owner to make alterations to the property, whether it’s adding a conservatory – or painting a boundary fence. In recent years, the practice has been for permission to be granted on payment of a fee – in some cases up to £2,000.

  • Additional information costs

Research by the Conveyancing Association suggests that many Lease Administrators charge fees of up to £800 to provide information necessary for a leasehold property to be sold – and the sale timeline can be increased by up to 20 days as a result.

It’s easy to see why these factors can quickly make a leasehold property unsaleable, leaving the unsuspecting leaseholder with nowhere to go. It’s no wonder the situation has been dubbed the ‘PPI scandal of the housebuilding industry’ – and why leasehold reform has become a priority for groups such as the Conveyancing Association, a group which Dezrez Legal is heavily involved with.

Leasehold reform consultation

In 2016, over 6,000 new homes were sold as leasehold – and while we don’t know how many of the leasehold agreements contained the kind of onerous provisions we’ve described here, it’s a fair bet that many will have done so. The shortage of housing stock and the housing crisis generally has opened up an opportunity for exploitation, which the proposed leasehold reforms are set to tackle.

The proposals include

  • A clampdown on property developers selling properties as ‘leasehold’ for no good reason
  • A reduction of ground rents to ‘peppercorn’ in all cases
  • Excluding leaseholders from possession orders for arrears of ground rent
  • Potentially changing the ‘Help to Buy’ scheme in relation to leasehold property

The proposals for leasehold reform have generally been welcomed and are the subject of an 8 week consultation period which will end in September 2017, before the proposals, if they are accepted, come into effect. This may not be until 2018.

And before 2018?

As we mentioned above, the leasehold reform proposals may not come into effect until 2018. If you are considering buying a new build property on a leasehold basis in the next few months, it’s vital that you take professional legal advice from a conveyancing expert to make sure you understand the terms of the leasehold agreement you are about to take on. It may well be the house of your dreams but if the leasehold agreement is cloaked in small print that will make it unsaleable in future, you may have to walk away. Sound legal advice will help you decide.

Here at Dezrezlegal, we’re taking a close interest in the leasehold reform proposals and will update you once the consultation process has ended and we know when the proposals will come into effect.

 

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