Government proposals to limit the sale of newbuild leasehold homes

On behalf of Attwaters Jameson Hill posted on Wednesday, October 4th, 2017

When you’re looking to buy a property, it’s not uncommon nowadays to find not just flats but also new-build houses for sale on a leasehold basis. With leasehold properties, buyers can have the option to buy the freehold - the land the property stands on - at some point. Leasehold property owners must pay ground rent – an annual charge – to whoever owns the land, the freeholder. And it’s the cost of the freehold, and the spiralling amount of ground rent that has been charged in some instances, that are now under scrutiny.

The government and the media have become increasingly concerned over the number of new-build houses sold on a leasehold basis. This has often been done to create an ongoing income stream from the ground rent, or to generate additional income from the subsequent sale of the freehold after exchange of contracts. The government is not alone in seeing these practices as representing poor value for consumers.

What has happened in several well-documented cases is that, unbeknown to the leaseholder, the developer has sold the freehold interest in a new-build residential property to a third party after they have moved in. When the leaseholder applies to purchase the freehold, they find themselves faced with significantly higher costs than they had been led to expect. In other reported cases, ground rents have more than doubled in a short space of time.

In its proposals, the government gives the example of a family home that has been rendered practically unsaleable because the ground rent will reach £10,000 a year by 2060, and that of another homeowner who had been told that she could purchase the freehold of her leasehold house for £2,000, but when she applied to do so, she was told that the cost had risen to £40,000.

Exploitation of the Landlord and Tenant Act, 1987

This piece of legislation gave leaseholders of flats the right of first refusal, which meant they had the legal entitlement to buy their freehold before a landlord sold it on to an investor. However, as this provision only related to leasehold flats and not houses, this loophole has been exploited and has led to the rise in leasehold houses.

Government figures show that in England there were around 4 million leasehold properties in 2014-15 and of those, 1.2 million were leasehold houses. In 2016, around 10,000 new-build leasehold houses were sold, out of a total of around 57,000 leasehold houses.

Government proposals

The government’s Housing White Paper ‘Fixing Our Broken Housing Market’, published in February 2017, highlighted the need for improvements to consumer choice and fairness in the leasehold sector. The Department for Communities and Local Government has now followed up on this proposal and launched a consultation entitled ‘Tackling unfair practices in the leasehold market’ which has just closed. Suggested reforms include limiting the sale of new-build houses on leasehold terms, and a requirement for independent legal advice for buyers.

Support for Help-to-Buy schemes

The government is also considering removing its Help-to-Buy Equity Loan support on new-build houses where they are sold on a leasehold basis in circumstances where the decision to use leasehold isn’t justifiable. Where there is justification to use leasehold, then the consultation suggests that financial support will only be available if ground rents are considered reasonable.

The way ahead

It is to be hoped that the government can make progress on this issue, improving the lot of leasehold house owners by giving them the consumer rights and protections they need.

If you are thinking about buying a leasehold property, we’ll always review the lease thoroughly on your behalf, go through the various clauses in it with you, and explain in plain jargon-free English what they mean in practice. If you’d like some advice, do get in touch.

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