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What does the future hold for leasehold properties?

Leaseholds have hit the headlines for all the wrong reasons with stories of buyers trapped in contracts with escalating costs. Nigel Read, Partner and Joint Head of Residential Property at SAS Daniels’, discusses the future of the leasehold sector.

Nigel Read

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Britain has had leasehold homes for hundreds of years, but they have attracted widespread attention in recent years. Concerns over escalating ground rents affecting thousands of homeowners have reached the public domain. Almost half of newly built properties in the UK are sold as leasehold properties rather than freehold so it is an issue that will continue to attract attention.

Recent reforms pave the way

Recent reforms in the property sector are paving the way for further changes and more transparency. The change in the way estate and letting agents are able to charge deposits with The Tenant Fees Act banning letting agent fees in June was an attempt by the government to make renting fairer for tenants. This has sparked a wider discussion of management company fees and ground rent issues.

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Nigel Read

We’ve seen a growing number of clients come to us with concerns about the issue. Quite rightly, homeowners in leasehold properties are unhappy about escalating ground rent costs and are beginning to question management fees being charged which do not appear to be in line with work carried out or a service received.

I have seen cases where a buyer and seller have been charged hundreds of pounds to simply assign a lease to another person. It has widely been considered that the sums charged are wholly disproportionate to the work carried out.

Government Reforms mean all new houses must be sold freehold and ground rents in existing leaseholds must be revised or even set to zero.

The Competition and Markets Authority has announced plans to investigate the mis-selling of existing leasehold homes signaling that it is an issue that is being taken very seriously at a top level. Furthermore, a UK Government and Parliament Petition to abolish leaseholds has attracted more than 30,000 signatures and continues to rise.

Why is it now an issue?

In the past, leasehold property owners were usually charged a minimal rent, but in recent years the landscape has changed. Following the completion of a new build development, it is fairly common for the developers to sell the freehold to the property to a third party without consulting the leaseholder. Although perfectly legal, the sale of a freehold can bring about many issues for the homeowner. The third party is purchasing the freehold as an investment and therefore may charge leaseholders a much higher cost if they want to buy the freehold – this can put off future buyers, effectively trapping a person in a property.

Other issues can include; complex ground rent clauses with excessive increases, premium charges to renew a lease term, the requirement of freeholder consent to make small changes to a property. The list goes on.

Thousands of trapped homeowners

It is estimated that the issue is affecting 100,000 homebuyers who are trapped into contracts. The fact that the issue has been covered in the national press can only be positive for both buyers and sellers and there are actions that homeowners living in a leasehold property can take to make sure they are futureproofed. We’re working on an increasing number of cases where buyers have been mis-sold a leasehold and the lease must be physically amended in order to protect buyers from future increases. This requires consent from the housebuilder in the first instance, and then a draft amendment to the deed. In most cases, the housebuilders do not dispute proposed changes. With the issue continuing to be in the public domain, we’re likely to see even more of these cases.

The government has acted on the issue, and new reforms mean all new build houses must now be sold as freehold and ground rents in existing leasehold contracts must be revised to a proportionate rate or sometimes set to zero. The ban is a welcome move which will stop housebuilders from exploiting homeowners by including unfair terms. Despite this move, it is unlikely that leasehold properties will be scrapped entirely, and it is important to point out that not all leasehold properties are bad. There are many thousands of properties with happy leaseholders occupying them, but it is vital that people understand what they have signed up to and that laws are in place to ensure unsuspecting homeowners aren’t taken advantage of.

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