The controversy over leaseholds and newbuild homes

by Iain Mason

Published on 28th September 2020

Leaseholds and newbuild homes: there has been much in the news in recent months about the problems homeowners have found and the associated fees they have to pay to the developers.

The issue is being investigated by the Competition and Markets Authority (CMA), which has now given the UK’s top four residential developers six months to sort out the problem or risk being taken to court.

What is leasehold

There are two main types of property ownership: freehold and leasehold.

Put simply, with a freehold property, the resident owns the property and the land on which it stands.

With leasehold, the resident may own the building but not the land it is built upon, instead renting (or leasing) the land, often for many years – perhaps even decades or centuries.

Leasehold is a common arrangement for flats, where each resident owns their flat, but they lease the land the flats are built on from the landowner, or developer or builder – whoever has the freehold. This isn’t always the case with flats, though. Sometimes, and particularly where a house is converted into flats, the residents collectively have the freehold – known as ‘shared freehold’.

Generally, houses are sold as freehold, but in recent years, for newbuilds, there has been a trend towards making them leasehold, and this is where the issues have arisen.

What is the problem with leaseholds and newbuild homes

The media has picked up on concerns homeowners have with the terms of their leaseholds.

According to Martin Lewis’s Money Saving Expert, some 12,000 homeowners are now subject to hefty annual ground rents that are paid to the freeholder (usually the developer) that, under the terms of the lease, double every ten years. These ground rents can prove attractive to investors, particularly where there is a guaranteed increase, which is part of the reason why developers sold properties in this way.

In some cases, people have bought their properties completely unaware that they are buying them as a leasehold and not freehold.

These spiralling ground rents bring a double problem for the homeowner, because they make the property difficult to sell and in some cases impossible to remortgage.

What’s being done to solve the leasehold and newbuild homes issue

In March last year, some developers and freeholders signed a pledge to remove excessive ground rents for existing and future leaseholders, but this wasn’t mandatory.

The CMA has been investigating and believes it has found evidence of mis-selling properties to unwitting buyers. Its order to the big four developers – Barratt Developments, Countryside Properties, Persimmon Homes and Taylor Wimpey – that they should issue refunds and hand over the freeholds to buyers who were sold expensive leasehold deals, is the latest in the saga.

At Optimum, we are watching developments with interest. In principle, there may be good reasons for houses to be sold as leasehold. For example, obligations to pay for the upkeep of communal areas – where these are not going to be adopted by a local council – can be more straightforward to recover from leases.

But to impose leases that start high and double every ten years, and to mis-sell properties without the buyer being full aware they are acquiring a leasehold, cannot be condoned.

Of course, careful scrutiny of legal paperwork relating to property sales should have highlighted a lease and its terms.

Our legal team here specialise in property law, so if you are buying a property from a developer and want some expert help and close scrutiny of the terms of the sale, especially if a lease is involved, then please get in touch.

Our Optimum team help homeowners in Swindon, Wiltshire and the surrounding area with expert legal advice for homebuying and selling.

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