The leasehold property trap

Posted : 5th May 2017

As widely reported in the national media, we now have a leasehold property crisis, where new homeowners are finding themselves “trapped” with unsellable houses. This is happening where new build houses are being sold as leasehold instead of freehold without this difference being fully explained to or understood by the buyers. The crucial difference between freehold and leasehold is with a freehold property you own the house in its entirety (building and the ground it’s built on) whereas with a leasehold you own the property but have to pay annual ground rent to the freeholder (which is often referred to as a communal charge). The detail which is often missed in contracts is that even though the ground rent starts at a set price it can double every 10 years, for example in one case the ground rent started at £295 a year and by year 50 of the lease the charge would then be £9,440 a year. That is not including any extra charges that could be added for extending the property e.g. if you wanted to build a conservatory.

The governments Right to buy scheme is particularly prone to these type of arrangements as the scheme stipulates that the property has to be a new build. So couples who are trying to get themselves onto the property ladder are the ones being ‘trapped’ the most as research has shown that in 1996 only 22% of new builds where leasehold, but by 2015 this had then increased to 43%. When this situation came to light the government quoted that around 6,000 properties where sold as leaseholds last year.

But just how much information is being given to these new homeowners? It seems like the whole situation is not being explained fully to either the homeowners or the property development sales assistants themselves. When buying a property, sales assistants have been quoted saying that due to the length of the leasehold (as it averages 100 years) it is “as good as freehold”. Another reoccurring situation is that the new homeowners are being quoted a price to buy the leasehold to their property (averaging between £2,000 and £5,000) but when they go to purchase it a year or two later, they have then been informed that it has been sold on to an investment company, who are now quoting up to a third of the property price. It is not being explained that the homeowners are unable to buy the freehold for the first two years of them owning the property, but after this time period they have a legal right to buy the freehold if they wish. The loophole that companies are using is that in this legislation it does not say that it has to be held by the original builder/ seller or even be held to the original quote. So freeholds are then being sold to third parties who seek to make a massive return by charging extortionate prices.

Our view

We believe it is the role of your Solicitor / conveyancer to point out to potential property purchasers that leaseholders risk facing future increases in ground rent charges which could be significant and that there are no guarantees regarding the cost of buying the freehold. Unfortunately we suspect some of the big property developers have had very close relationships with conveyancing firms (i.e. through high volume referral arrangements) and there have been conflicts which might have got in the way of providing as complete conveyancing service which the buyers deserved.

We are a truly independent firm of Solicitors. We don’t accept referral fees from developers and we also look after our client’s interests first. If you are thinking about buying or selling a home and are unsure where to turn to for legal advice please contact us now for a no obligation competitive quotation.

Links to relevant media articles on this issue can be found below:

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The leasehold property trap