Is your ground rent spiralling out of control?
During the past few months there has been somewhat of an explosion of the ground rent scandal in relation to leasehold houses. This has resulted in the Government recently launching a consultation into banning unfair leasehold practices, including the sale of new build houses which contain punitive ground rent clauses.
An eight week consultation was launched on 24 July 2017 which will consider the various unfair practices. This is clearly justified, bearing in mind that there are four million leasehold homes in the UK. As a result of this scandal Taylor Wimpey have set aside £130m to compensate buyers of new built leasehold houses.
What is a Leasehold House?
Traditionally, houses are sold as freehold which allows the buyer complete control over the property. The difference with a leasehold house is that the buyer is only effectively a tenant with a long term rental, meaning that the ground the home is built upon remains in the hands of the freeholder.
It is for this reason that the buyer has to pay an annual ground rent. The lease provisions may also provide that the Leaseholder will need to obtain consent to make any changes to the property, such as building a conservatory or changing the windows.
Initially, owners of leasehold houses were only required to pay a peppercorn rent which is a nominal rent which can be as little as £1.00 per year and is often not collected by the Freeholder.
However, earlier this century developers started to insert clauses into leases setting ground rent rates to £200 to £400 per year, doubling every 10 years.
This had an adverse impact on first time buyers who, although were often advised that acquiring a 999 year lease ‘was a virtual freehold’, often found themselves in the position where ground rents would spiral to absurd levels.
In one example, the Government quotes a family house where the Ground Rent is expected to hit £10,000 a year by 2060 and another example where the ground rent commencing at £250 per year, could in theory, after 150 years, increase to £8m per annum.
This clearly has a detrimental effect upon the long term saleability of the property and as a result of this, many home buyers are trapped in contracts with spiralling ground rents which are impossible to sell. Leaseholders of flats are also subject to the doubling ground rents and may find themselves in a similar position.
How do Mortgage Lenders react?
Not only do home owners find it impossible to sell the properties but in addition, mortgage lenders will not grant mortgages against such properties. Nationwide in particular, is one of the first lenders who have refused to grant mortgages against homes with onerous ground rent clauses. It is estimated by the Leasehold Knowledge Partnership who have vigorously campaigned on this issue that around 100,000 home buyers are trapped in contracts with spiralling Ground Rents.
Impact on the legal profession
One of the issues which has arisen is the fact that many developers use their own recommended conveyancers to deal with the sales of properties.
These types of properties are normally more attractive to first time buyers and as a result of this, many buyers have stated that the ground rent risks were not fully explained, resulting in many conveyancers facing multiple legal actions and also accused of acting under a conflict of interest.
It is important that as solicitors, when involved with leasehold properties, we clearly alert prospective purchasers to any onerous ground rent clauses as failure to do this, leaves us open to potential claims of negligence.
Another issue arises where conveyancers who may not be experienced solicitors, may not recognise cleverly hidden ground rent clauses. In one particular example, a clause in the lease stated that the ground rent would increase to a percentage of the rentable value of the property.
This is a clause normally seen in commercial leases as opposed to residential and as the clause was well hidden, it was not brought to the attention of the purchaser.
The annual ground rent started at £50 a year or 1% of the sale price or 60% of the rentable value, whichever is the higher. This resulted in a house purchased in South East London 20 years ago for £150,000.00, resulting in a ground rent of £32,000 per annum.
To misunderstand such a significant provision in a Lease clearly, has grave implications upon the legal profession. When the conveyancing is carried out by a junior member who is unaware of the implications of the clause, this situation could easily arise.
Agents also have to bear some blame in these situations as they are more anxious to get the sale through rather than being up front in respect of the implications of the ground rent clauses as they do not wish to deter prospective purchasers.
In order for solicitors to be fully protected, it is essential that any onerous provisions are clearly highlighted and explained to prospective purchasers and appropriate evidence of that advice clearly documented.
Impact on purchasers
Purchasers do need to be diligent, to read any paperwork carefully provided by the solicitors and more importantly, to ask questions about any aspects they do not understand.
Many first time purchasers, eager to be buying their first property may often skim over the paperwork and not fully understand the significance of carefully reading the provisions of the Lease.
Purchasers of Leasehold houses also face an additional obstacle in respect of the escalation in the price and value for purchasing the Freehold.
Although buyers were typically quoted that they could purchase the Freehold for the sum of £3,000 to £4,000, following completion of developments, the developers would make large profits by selling the Freeholds on to independent investment companies resulting in home buyers being charged up to £40,000 or more to purchase the Freehold.
This has become a major problem due to the fact that there is no means for the purchaser to prevent the developers from selling the Freehold to independent companies following completion.
It is important that buyers are made aware that there is the potential for the Freehold to be sold on to the investors which will result in high prices and the impossibility of any buyer being in the position to purchase the Freehold.
What does the Government intend to do?
Ultimately, the Government wants to ban new build Leasehold houses and block unfair ground rent clauses. Under the proposals ground rents would be reduced to zero or to a transparent figure that relates to the actual cost incurred by the Freeholder. In addition, Leasehold new build houses would be banned, except for exceptional circumstances.
The Communities Secretary Sajid Javid has stated:
“it is clear that far too many new houses are being built and sold as Leaseholds, exploiting home buyers with unfair agreements and spiralling Ground Rents. Enough is enough. These practices are unjust, unnecessary and need to stop.”
The Government has also indicated that it plans to include measures to close legal loop holes to protect Leaseholders who may be left vulnerable to Possession Orders as well as changing the rules on Help to Buy Equity Loans so that they can only be used for new build houses on acceptable terms.
Although the Government measures will ultimately have an impact upon many large developers, it will hopefully place first time buyers in a more favourable position and prevent them from having to buy properties which have no future prospect of sale.
For further guidance on this article or any other property related matters please contact Amanda Hodgson, Property Partner.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
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