19 Jul 2017
Author: Stephen Breen
Around 100,000 homeowners are stuck with high-cost leases that allow huge hikes in ground rent, making their properties unsellable. The problem affects owners of new build properties offered by house building companies.
Buyers were offered a lengthy lease or the option of purchasing the freehold for an extra sum. With a term of around 250 years on the leasehold and the promise of being able to purchase the freehold in the future, some buyers have decided not to pay for the freehold up front.
One couple from Merseyside declined to purchase their freehold for £5,900 based on verbal assurances that they would get first refusal in the future. The builder then sold the freehold on to another company just two years later without telling them. The couple approached the new company asking how much it would cost to buy the freehold and were charged £108 for their query. They were also quoted a price of £44,250 – a sevenfold increase on the original quote..
At that point the couple examined their lease and discovered their ground rent, currently set at £295 per year, could double every ten years. After 50 years the ground rent would be a staggering £9,440. The couple say that their legal advisor did not mention this clause when they made their purchase.
For the 100,000 people stuck with this type of lease, the increases in ground rent will make the property more difficult to mortgage and less likely to sell. In May, Nationwide announced it would not be lending on new build properties with unfair leases. It stated:
“The ground rent must be reasonable at all times during the lease term, with unreasonable multipliers such as doubling every five, ten or fifteen years not allowed. Escalation should instead be linked to a verified index, such as the Retail Price Index.”
Santander and Barclays have also indicated that they may not lend on properties where the ground rent can rise by more than the rate of inflation.
In November, the Guardian reported that owners were being told their property was effectively worth zero after just six years as result of the clauses.
According to the Leasehold Knowledge Partnership, the practice of selling leasehold properties arose after the 2007/8 financial crisis. House prices had crashed and developers were struggling with tight margins. By separating the freehold from the leasehold, they could guarantee future income from ground rents or create an asset that they could sell on in future.
Soaring ground rents are not the only problem experienced by those whose freehold has been sold on. With a leasehold property, permission to alter or build will be necessary – and owners are being charged fees of over £1,500 before such permission is granted. One owner wanted to build a tiny extension that would not otherwise need planning permission. She was quoted £1,615 to obtain permission which included £110 for the initial request, £225 for a surveyor visit, £600 for the surveyor report, £200 admin fees and £480 for the freeholder’s solicitor fees.
When buying a new build property, use a local solicitor or your choice.