Sajid Javid, the Communities secretary, knows how to work the headlines. His latest campaign is to prevent abuse of the leasehold system which has seen home buyers locked in contracts with spiralling ground rents. While his cause is just, industry players have argued that an outright ban could do more harm than good.
The so-called ground rents scandal has left some 100,000 buyers locked in unsellable new homes. “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,” said Camilla Dell, Managing Partner at Black Brick. “In one instance the ground rent became equivalent to the GDP of a small EU country over the period of ownership.
“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.”
Matthew Turner, Managing Director at Astute Property Search added, “Developers should be required to offer buyers a 999 year lease or a share of the freehold. 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.”
However, industry players have warned that an outright ban could hinder the delivery of new homes. “It is clear that some action is needed in the leasehold market, but any future government sanctions need to be carefully targeted in order to avoid making the disruption worse for homeowners or inhibiting the future development of new homes,” said Stephen Barter, KPMG UK’s Chair of Real Estate Advisory.
“Long leasehold tenure has traditionally been used as an efficient way of managing apartment blocks and managed estates. The government needs to consider outright sanctions very selectively, but also needs to urgently promote the creation of industry best practice guidance on ground rent, landlord approval and service charge regimes, including the notification and right to buy arrangements for tenants.”
Ian Fletcher, Director of Real Estate Policy, British Property Federation added, “It is important to distinguish between houses and flats, where the use of leasehold in flats is very common, but irregular in new build houses. Traditional freehold owners of leasehold flats have been aghast at the use of leasehold in houses, which is in most cases wholly unnecessary and inappropriate.
The House Builders Association (HBA) – the housebuilding division of the National Federation of Builders (NFB) – believes that leaseholds can still be a legitimate model of ownership for housing. Everything, of course, depends on how properly this model is managed.
Rico Wojtulewicz, policy advisor for the HBA, said, “Ground rents can be legitimate for the adoption of roads, sustainable drainage costs, maintenance of common spaces, or lighting on a site. However, there needs to be clarity in the process and fees need to be fair. Value doesn’t end at the point of sale.”
Rather than completely outlawing leaseholds on new-build homes, the government could explore ways to make the system fairer in a manner that works for people. A commonhold system was introduced to English property law over a decade ago, however it has been barely used.
For some, exposure of the scandal has simply come too late. Scotland automatically converted long leases to outright ownership in 2012; however, there has been no hint that England will follow its example, leaving no help for those trapped in contracts with spiralling ground rents.
John Healey MP, Labour’s Shadow Secretary of State for Housing, said, “The government’s pledge is welcome but legislation is needed and this got no mention in last month’s Queen’s Speech.
“Home-buyers need legislation to ensure the end of this leasehold abuse, cap rip-off rises in ground rent and deal with existing contracts that contain unfair buy-out clauses. Nearly half of all newly-built properties were sold leasehold last year, and existing leaseholders need stronger rights too.”