For many years some housing developers in the UK were involved in a leasehold housing scam; they found a very lucrative second income stream, but this was all at the expense of innocent buyers.
Usually these were young inexperienced couples who were easy prey when it came to getting them to sign on the dotted line. These people thought they were buying a new home, they didn’t realise it still belonged to the developer.
Homeowners who bought into leasehold housing developments saw their ground rents and service charges rising far faster than they ever expected. Some were told they could purchase the freehold later at low cost, but when they tried they found the cost was out of reach, running to many thousands of pounds. Some then found themselves trapped and unable to sell their property because of the liabilities surrounding the high charges.
House the developers’ system worked
This is how it worked: The developer sells the house - usually enticing the buyers to use their own solicitors - with a leasehold title rather than freehold. Then the developer sells the freehold on to an investment company, which provides the investor with a long-term income and a large pay-out for the developers.
Leasehold ownership, where you buy and own the property but not the land it sits on, makes sense if it’s in a block of flats, where the individual flats are owned by many different people. But the arrangement does not make sense for stand alone houses.
Developers were allowed to sell their homes on a leasehold basis, which means they could then charge high and escalating ground rents. This is an annual charge leaseholders must pay the freeholder, plus they can charge extortionate fees if the leaseholder needs to get permission from the freeholder for alternations to the property.
What is leasehold and freehold?
Land titles in England hark back to the feudal times of William the Conqueror, 1066. The term freehold is mentioned in the Doomsday Book and means the permanent, unencumbered and absolute tenure of land or property with freedom to dispose or alter it at will – it’s about as near as possible to full ownership as it gets in England because ultimately all the land is owned by the Crown.
Land gave people power in the Middle Ages and powerful families wanted a mechanism to retain ownership of their land while away from it, and maximising their earnings from it. Leasehold gave them that mechanism, allowing others to occupy their land, for a specific or extended period of time, but they could get their land back at some point and earn an income from it in the meantime.
Long-leaseholds are useful, and in some respects necessary, in a multi-occupied buildings. Someone must coordinate maintenance work, including safety matters and repairs to the structure / common parts, because left to individual flat owners it simply would not get done. The building would fall into ruin and destroy value for all the leaseholders.
Leasehold house sales banned
Thankfully for buyers, from 30 June 2022 The Leasehold Reform (Ground Rent) Act 2022 banned ground rent charges on new residential leases in England and Wales. The government has said it has been working to abolish ground rents for a number of years as part of a suite of reforms to the leasehold system. It says that ground rents “provide no clear service and can be set to escalate regularly, with a significant financial burden for leaseholders”.
But to the consternation of leaseholders, the Government’s stated plans to abolish leasehold home ownership altogether have been watered down by the Secretary of State for Levelling Up, Housing and Communities, Michael Gove, after he previously pledged to get rid of the 'feudal' system.
Some leaseholders still feel cheated because, as some argue, it is now a “two-tier system” because although those who buy leaseholds now have been helped, existing leaseholders are still stuck with the problem of mortgage lenders being really risk-averse.
Michael Gove said earlier this year: “I don’t believe leasehold is fair in any way. It is an outdated feudal system that needs to go. We need to move to a better system and to liberate people from it,” but it seems he has since backed down on such a drastic reform of the system.
However, some changes are expected to be introduced over the coming months. One is to help leaseholders choose their own property managers, to cap existing ground rents and prevent building owners charging leaseholders for the legal costs involved in legal disputes.
It was probably inevitable that once the Government went into the complications and vested interests involved in removing leaseholds, the idea of abolishing them had to be binned – Commonhold is one alternative but despite being available to leaseholders for many years, it’s never taken off.
So, how do the new rules will work?
Buyers of houses or flats on long leases, after 30 June 2023, don’t need to pay ground rent. If the freeholder demands ground rent, it can only be charged at “one peppercorn”, effectively a zero amount.
These new leasehold rules apply to retirement housing as well from 1 April 2023, though exceptions are made for some community-led housing and business leases. Existing leaseholders who voluntarily decide to extend their leases will also have their ground rent set to zero.
The change in the law was brought about with the help of a pressure group headed by northern leaseholder Katie Kendrick, whose battle began when her young family bought a new £214,000 house in Ellesmere Port, Cheshire through the Help to Buy scheme.
Trouble began when she found it would cost her nearly £3,000 for permission from the freeholder, an investment company, to do a kitchen extension. This prompted her to band together with two other leaseholders to start the campaign which has resulted, after a 9 year struggle, in getting the change in the law.
However, she’s not done yet, she intends to continue her campaign to get leaseholds totally abolished, and to help publicise this a play, entitled “Fleecehold”, tells the personal stories of how three women (Kendrick and two leasholder friends) took on the powers behind a system that dates back to 1066 and William the Conqueror.
Kendrick started the National Leasehold Campaign (NLC) which now has 27,000 members and they intend to stage banner campaigns outside of new developers warning buyers about leaseholds.
As the law stands today it still allows freeholders and developers to levy charges on the people who bought nearly 5 million homes. They are leaseholders with a right to live in their homes long-term, for example 99 to 150 years, but control lies with the freeholder.
Buyers of leaseholds should educate themselves about the ins and outs and pitfalls, because it’s not just young couples who buy leaseholds, many landlords fall into this category when they purchase flats.
It's important that prospective buyers and leaseholders thoroughly review lease agreements, make sure they understand the terms and associated costs, and seek legal and financial advice before committing to a leasehold property purchase.