UK government clamps down on onerous lease terms & leasehold houses

External view of the Houses of Parliament

In 2017, the ground rent scandal exploded across UK media. It exposed the onerous clauses that developers had inserted into leasehold contracts, in some cases doubling the ground rent leasehold homeowners had to pay every 5 years, effectively making their homes unsaleable.

When buying a leasehold home, the owner will often learn that the terms of their lease include provisions to pay the freeholder an annual ground rent and management fee to insure, maintain and service communal areas. The buyer must also seek permission from the freeholder when making any changes to the property. Traditionally, this annual ground rent was often a small amount, sometimes as little as £10, and in many cases freeholders didn’t actively collect it.

In recent years, however, opportunistic developers have exploited homebuyers by inserting clauses into the contracts of new-build houses and flats that causes ground rents to spiral. Rather than a low “peppercorn” ground rent, ground rents had been set anywhere between £100 to £600 a year, and in some cases, these ground rents double every 5 to 10 years or increase frequently by specific amounts.

Onerous ground rent clauses have trapped UK homeowners in contracts where the spiralling ground rents makes their home virtually unsaleable. This is because the majority of lenders won’t grant mortgages against leasehold homes with these contracts, and conveyancing solicitors will advise prospective buyers about the repercussions of these clauses. In cases where these homes are sold, it is at a huge discount to their true value.

In instances where homeowners have tried to buy the freehold to remedy this problem, they have discovered that the freehold had been sold to investment companies, and would be faced with extortionate prices to buy it back. The onerous ground rent clauses made these freehold properties a lucrative venture for investment companies as they offer a guaranteed return on investment for the freeholder, providing a legally enforceable source of income.

To put into context those who have been affected by onerous ground rent clauses, The Department for Communities and Local Government have estimated that 1.4 million houses and 2.9 million flats have been sold with these contracts across the UK. Moreover, The Leasehold Knowledge Partnership estimates that approximately 100,000 homebuyers are trapped in contracts with spiralling ground rents.

In December 2017, the government announced new measures that aim to address unfair residential leasehold practices. The announcement followed a government consultation where thousands of homeowners complained about these underhanded leasehold practices.

The measures include a ban on leasehold agreements on new-build houses in England, and a ban on all ground rents on leasehold properties. The Government will also be reviewing the legislation around commonhold tenures.

Commonhold was originally introduced by the Commonhold and Leasehold Reform Act 2002 in order to overcome the disadvantages of leasehold ownership. Commonhold was intended to be the standard form of tenure for new-build blocks of flats however very few of these developments offer commonhold ownership.

The Government’s announcement was intended to make the process of buying a freehold or extending a lease much easier and cheaper, however, it will take time and legislation before they become law.

The current ground rent cap in the UK is set at £250 (£1000 in London) and there is a possibility that the Government will introduce a new cap of 0.1%, comparative to the value of the property. For example, in instances where properties are valued £200,000, the ground rent cap of 0.1% would be set at £200 per annum. However, in instances where the value of the property exceeds £250,000, the annual ground rent would be higher than the current UK cap of £250.

Mortgage lenders such as Nationwide have recently announced that they will no longer lend against new-build properties in instances where the ground rent is more than 0.1%, or if the lease is less than 125 years.

We have seen in the industry that freehold buyers are paying far less for ground rents than they were last year. Typically speaking, if the cost to borrow money increases, this has a knock-on effect on the property market.

Following the Government consultation, the uncertainty as to whether ground rents will be banned is causing tensions within the property market, so much so that some companies are ceasing to buy freeholds. We predict that an outright ban on ground rents will not go ahead, and we are continuing to buy freehold interests.

Here at Freehold Sale, we pride ourselves in working with our clients in an ethical way. We ensure that our business practices are not only profitable for freeholders, but always fair to leaseholders.

What are your thoughts on onerous ground rent clauses? Do you think more should be done to help homeowners trapped in spiralling ground rents? Share your thoughts and experiences with us in the comments below.

Adam Lowe

Adam Lowe

Adam has worked in the property sector for 20+ years. He specialises in the ground rent and freehold reversion space, providing services to clients from private landlords to corporate investors. Freehold Sale launched In 2013 where Adam enjoyed success building and managing freehold portfolios with partner companies.

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