Communities secretary Sajid Javid has laid out plans to stop new build houses being sold as leasehold., with an additional proposal to restricting ground rents – often imposed by the freehold owner with punitive rises over the long term – to as low as zero.
Ahead on an eight-week consultation on the matter, Javid said: “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. Enough is enough. These practices are unjust, unnecessary and need to stop. Our proposed changes will help make sure leasehold works in the best interests of homebuyers now and in the future.”
With leasehold usually applying to flats with communal spaces (reception areas, corridors, gardens etc) it has become more commonplace for developers to sell houses, usually sold freehold so that the owner of the property also owns the land on which it is built, in the same way. Records currently show some 1.2m houses in the UK owned under leasehold.
In recent months, more and more stories have emerged about owners hit with hugely increased ground rents – in his statement, Javid mentions a house that is now unsaleable because the ground rent is set to reach £10,000 per year by 2060 – and freehold owners charging very large fees to allow extensions, or presenting leaseholders with bills far greater than initial estimates.
Among the measures to be considered during the consultation period are:
- setting ground rents to zero levels, or at the very least reduced to a level that relates to the actual costs incurred
- closing legal loopholes to in order to protect consumers
- amending the rules on equity loans under the Help to Buy scheme to make it only available on “acceptable terms”
Property industry professionals have started to respond to the proposals:
Camilla Dell, managing partner at independent buying agency Black Brick: “We welcome this news as it adds protection and a layer of certainty to buyers of new builds going forwards. When purchasing any property, new build or not, with a long lease, the ground rent should always be peppercorn, but it does come down to the conveyancing process and for the buyer’s solicitor to carefully check the sales contract and ensure buyers interests are protected. This is why it’s so important to work with a good lawyer.
“In the past, I have been witness to some very unfair clauses in sales contracts for new builds, where the ground rent escalates disproportionately over time. In one instance the ground rent became equivalent to the GDP of a small EU country over the period of ownership (this was in relation to an off-plan purchase we were involved with in One Hyde Park back in 2007). Luckily our client’s solicitor picked up on this point and negotiated it out of the contract, but some buyers will have been caught out. This is an extreme example, but does happen on other developments of lower value.”
Mark Farmer, co-founder and CEO of Cast: “The government’s plans to ban leaseholds on new-build houses in England is a step in the right direction for fixing our broken housing market. Leasehold agreements for houses and the subsequent ground rents that are charged, artificially distort a housing market that is already struggling with issues surrounding affordability. Banning developers from selling new build houses on leasehold agreements to drive additional revenue may help recover some of the confidence that the public has lost in the sector. Without action on this and the parallel housing quality debate there is a real risk of buyers starting to move away from new build stock which would be a disaster for housing supply."
Martin Bikhit, managing director of central London estate agency Kay & Co: “We welcome the ban for leasehold fees on new build houses. High ground rents substantially increase the cost of a lease extension or the purchase of the freehold of a property, so this proposal will make things much fairer for buyers in the long run.”
Matthew Turner, managing director at Astute Property Search: “The leasehold ban is welcome news, as there has been little consistency with fees for lease extensions. The archaic leasehold/freehold system is nothing more than a money-making scheme. Freeholders charge differing amounts for licences, with some even charging to let out a property. Developers should be required to offer buyers a 999-year lease or a share of the freehold.
“We have seen more and more leaseholders club together to buy a lease in order to gain a share of the freehold. A block with self-governance and where all the leaseholders own a share in the Freehold are much more desirable to purchasers as they care about the building they are living in and service charges are nearly always less in blocks where the leaseholders are also the freeholders.
“Most mortgage companies will not look at properties with lease lengths shorter than circa 60 years making a property less saleable. The market should move towards a virtual/freehold model where an owner owns the property outright indefinitely. I am sure solicitors and agents would welcome a smoother system. Transactions are made so much more complicated with freehold enquiries.”
Louie Burns, managing director of Leasehold Solutions: "Leasehold Solutions welcomes this morning's news that communities secretary Sajid Javid has put in motion proposals to ban the sale of new build leasehold houses. The government's plans, which are now subject to an eight week public consultation, include banning leaseholds on all new build houses and reducing ground rents in England. Although Leasehold Solutions welcomes the news of the consultation, it is a very small step in the long battle against abolishing the outdated leasehold system. Pressure and tireless efforts from the National Leasehold Campaign to raise awareness about leasehold houses has already resulted in sales of these types of properties decreasing, as more people become aware of the scandal and developers' dirty tricks. The leasehold scandal is a very serious situation and goes deeper than new build leasehold houses. There are already thousands of flat owners caught up in leasehold properties paying extortionate ground rents and onerous service charges. Leasehold Solutions is now keen to see what the government's plans will be to help those already living a leasehold nightmare, and when legislation will change to help those people already trapped by leasehold."
Tina George, head of real estate at solicitors DMH Stallard: “The news this week regarding the government’s intention to consult on the matter of leasehold houses will be a blow to housebuilders and developers, of that there is no doubt. Schemes in the pipeline that have factored in a ground rent yield will have to be reconsidered in terms of their viability. That could mean that the cost of new houses on such schemes will have to increase to make up the shortfall in projected investment income.
"It is by no means a done deal that there will be a prohibition altogether on leasehold houses, especially given the amount on the government’s plate over the next 18 months, but there certainly seems to be enough public weight behind the initiative to give it legs. For consumers and property purchasers the news will be welcomed, although it is worth noting that owners of leasehold houses may have the right to buy their freeholds provided certain conditions are met. They are able to do so by virtue of an Act of Parliament that has been in force since the 1960’s following a time when leasehold houses were very commonplace.”