You may remember that back in the 2000s, some developers sold homes on a leasehold rather than freehold, without buyers understanding the contracts they were signing. Occasionally the freeholds were sold to offshore investors who then asked for big payments from the homeowners to buy out the contracts.
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What is ground rent?
A freehold property means that the owner owns the property as well as the land it’s set on. A leasehold however means that you purchase the property but not the land it’s on, someone else owns this. You then need to pay the freehold owner annual ground rent, which should be dependent upon the value of the land. Leases granted by house builders are usually for very long periods of time, like 250 or 999 years.
There isn’t only ground rent involved in leasehold properties, there could also be fees charged by the freeholder for the leaseholder to build an extension or re-house repayments the property. Once the lease ends, the property returns to the freeholder.
How much are ground rents?
In the past, ground rents have been low, usually less than £50 per year. But in the last few years house builders have increased the price to £250-£500 per year. The developers also added terms in the lease allowing them to review ground rent after certain time periods such as every 10 years. This means that they are allowed to increase ground rent payment each review period should they choose.
For example, if a ground rent doubles every 10 years, starting at £250 per year and goes on for a long term, after 60 years you’d be paying £16,000 per year which is far too expensive for most. It also shouldn’t be passed on to tenants of rental property.
If you’re a leaseholder and you purchased a new build in the last 10 years, check the lease to see what it says about ground rent.
Is it best to sell leasehold houses?
There was high publicity around the ground rent scandal which means that most people will be aware and check the relevant clauses in the contract. If you were able to find a buyer, house repayments lenders refuse to offer loans on the properties. Therefore, properties affected by the ground rent scandal have experienced drastic effects on their values.
What can you do?
If you’re able, try and purchase your freehold from the freeholder. If it’s unreasonably high, it could be possible to agree amendments with the freeholder on the terms of the lease regarding ground rent, but even this could set you back a significant amount.
You may also be able to claim against your solicitors who helped you with the property purchase. If they didn’t provide you with clear advice about the ground rent clause so you understood the risk, you may be able to argue that they were negligent.
What is the government doing?
It’s been decided by the government that all new build houses will be sold as freehold, and ground rents on new leases will be zero.
The lack of transparency in the selling of leasehold properties is being looked into by The Competition and Markets Authority (CMA). They will speak to developers, lenders and freeholders to find out information on how the leasehold agreements were written up, agreed and maintained. It will also look into how these terms have affected leaseholders and their lives. If the CMA finds solid evidence of leasehold mis-selling, developers and freeholders could face legal action.
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