Leasehold agreements have been around for hundreds of years but this year they were bought into the limelight when it was suggested that up to 100,000 leaseholders are trapped in developer contracts with spiralling ground rent costs. And so the government stepped in…
Historically, ground rent was kept to a minimum. A mere token of ownership. Sometimes as little as £1 a year, sometimes not even collected. However at some point in the last century, freeholders and specifically property developers, have realised that in a long term leasehold contract, there is a lucrative profit to be made from ground rents. Many freeholders implemented contract changes which increase the amount of ground rent due, every ten years. Now the penny has dropped and it seems this has caught up with leaseholders.
Let’s wind back a little and explain the whole leasehold/freehold position. Traditionally houses have been sold freehold, meaning you own the property and the land it is on. You have complete control of both. Leasehold properties are effectively a long term lease agreement, often for 999 years. Leaseholders own the property for a fixed period of time, stated in their contract with the freeholder. Leaseholders are required to pay annual ground rent on the property and must ask permission to make any major changes to the property. For example, building a conservatory. Ownership of the property returns to the landlord when the lease comes to an end.
The canny property developers who inserted incremental clauses into their leasehold contracts, could double their ground rent every ten years. This could equate to an interest rate of 7% a year and when the Bank of England base rate is just 0.5%, that’s not to be sniffed at!
In terms of figures for leaseholders, the average ground rent is estimated by Direct Line to be in the region of £370 per year. Double that every ten years and leaseholders will quickly sink in ground rent costs. The government estimate that by 2060, the average ground rent could be as much as £10,000. And so leaseholders are beginning to panic.
The government have now proposed a ban on all future sales of houses as leasehold. But the big issue is for those leaseholders stuck in existing agreements. For the freeholders of those properties, that’s a guaranteed and legally enforceable income, worth a phenomenal amount. Why should they review the contract? The leaseholder signed the rental agreement that included the incremental clauses so technically, they are bound by it.
With no reasonable resolution in sight, fingers then start to point to the conveyancing solicitors who oversaw the purchase of the leasehold properties. Many buyers – specifically first time buyers – feel they weren’t properly informed of the implications of the incremental ground rent clauses. As a result, some solicitors are now facing legal action for failing to warn their clients of the rising costs of ground rent.
The government is backing the introduction of more compensation programmes. Set up by property developers such as Taylor Wimpey, they pay out to new-build leasehold property owners, who face their property being pretty much near-worthless because of ground rents.
So how many properties are affected by the leasehold scandal in Medway?
There are currently 14.95 million properties that are owner occupied in England and Wales. Statistics from KCC indicate that as at 31st March 2016 there were an estimated 113,170 dwellings in Medway, 92% of which were privately owned. Data from Land Registry indicate 9256 properties are leasehold. This is approximately 8% of privately owned properties, which is less that the national average of 15%.
With the number of new developments that are appearing in Medway, it would be easy to assume this could quite feasibly have increased. Call it greed or call it good business on the part of developers, the outcome is that thousands of leaseholders have been left with spiralling ground rent costs and very few options for recompense.
So how does this impact you? Is this making you think twice about buy-to-let investments that are leasehold? I’m really interested to hear what you think. Get in touch any time. Email me at email@example.com, contact me via LinkedIn or join our discussion group over on Facebook.