The Competition and Markets Authority is investigating four of the UK’s biggest housebuilders after troubling evidence has been exposed over the way they have been selling leasehold agreements.
Daniel Brumpton – partner and head of Nelsons’ professional negligence team, which is dealing with compensation claims from homeowners across the country who are trapped in unsaleable homes due to onerous ground rent charges – explains what landlords can do if they are caught in the trap.
The investigation into Barratt Developments, Countryside Properties, Persimmon Homes and Taylor Wimpey came about due to complaints from buyers claiming they have become stuck in leaseholds with increasing and unfair ground rent fees.
The CMA is currently awaiting responses from the housebuilders concerning their selling of leasehold properties. The government department is also investigating other companies that purchased freeholders from these housebuilders and have then continued to use the same “unfair leasehold contract terms”. These companies could also face legal action, and leaseholders could receive refunds.
There are currently four million leasehold properties in the UK, with around 100,000 of these being affected by onerous ground rents. Over the past few years, there have been a number of CMA investigations and other reports concerning unfair fees in leasehold arrangements.
In the 2000s, developers started selling homes on a leasehold, rather than freehold, basis – often without the buyer fully understanding the contracts they were entering into. In some cases, the freeholds were then sold to offshore investors, which have since demanded large sums from homeowners to buy out of these contracts.
What are ground rents?
When a home is sold as a leasehold, the buyer owns only the house itself. The freeholder owns the land, meaning the buyer must pay ground rent annually, which is meant to reflect the value of occupying the land/ground.
The purchaser occupies the property on the terms set out in a legal agreement called a lease. The leases granted by the housebuilders to buyers are usually for long periods, such as 250 years or 999 years.
In recent years, housebuilders have been selling new build properties to buyers on a leasehold basis, meaning the housebuilder retained ownership of the freehold. In many cases, housebuilders then went on to sell the freeholds to third parties, such as investment companies.
Other payments provided for long leases can include fees charged by the freeholder to the property, such as building an extension or for agreeing to a re-mortgage of the property. Ownership returns to the freeholder when the lease comes to an end.
I own a buy-to-let property and pay ground rent – do I have a problem?
Historically, ground rents have been low – no more than around £50 per year. However, in the last few years, housebuilders have started to increase ground rents to an initial charge of between £250 to £500 a year.
They have also added clauses in the lease that allow them to review the ground rent periodically, for example, every five, ten or 25 years. Typically, the review clause allows the freeholder to increase the ground rent at each review.
In theory, a ground rent that doubles every ten years doesn’t sound too bad. However, most leases are set for a long term such as 999 years. If a ground rent of £250 per year doubles every ten years, you can expect to pay £16,000 per year after 60 years. For many people, that’s simply unmanageable.
If you are a leasehold owner who purchased a new build property in the past ten years, you should check your lease to see what it says about ground rent and what you can expect to pay.
Should I sell the leasehold houses I own?
Because of national publicity, many buyers are now aware of the problem and unfortunately, will not buy a property with an onerous ground rent clause. The existence of such clauses has also led to banks and building societies refusing to lend on those properties.
This means that in the unlikely event that a buyer is still prepared to buy a property affected by a ground rent clause, they are highly unlikely to be able to obtain a mortgage to complete the purchase. This clearly has a huge effect on the value of these properties, and, in some cases, they may well be worthless.
Even to a cash buyer, a property affected by the onerous ground rent terms will be unattractive, as the burden of the clause will be inherited via the purchase.
What can I do?
If you have the finances, you could try and purchase your freehold from the freeholder, but in many cases, the price of the freehold is vastly inflated – amounting to tens of thousands of pounds.
It might also be possible to agree on amendments to the terms of the lease and the ground rent clause, but this is also likely to come at a significant cost.
Finally, you may have a claim against the solicitors that you instructed to help with the purchase of the property. If the solicitor failed to give you clear advice about the existence and implications of an onerous ground rent clause so that you could understand the risk and the impact, you may be able to successfully argue that your solicitors have been negligent.
Is the government doing anything about the problem?
The government announced that all newly built houses will now be sold on a freehold rather than leasehold basis, with ground rents on new leases being reduced to zero.