Richard Carr: Why developers should support the government’s leasehold changes

At Fortitudo Property we’re focused on helping to shape and build communities through our developments and industry expertise. Helping buyers to enjoy fairer treatment and get the best value for their money is part of our remit.

That’s why we’re in favour of the government’s move to overhaul England’s leasehold system. As part of our innovation drive, we have introduced 999-year leases with a part share of the freehold at Zero (Peppercorn) rent, which strikes a good balance for Fortitudo as a developer and for our buyers.

Background to the leasehold consultation

Richard Carr house purchaseTraditionally, leasehold properties are apartments with shared communal spaces, such as landings and entrance halls. Over recent years, major developers started to sell new-build houses as leaseholds as well, and they now account for around four million UK homes.

A leasehold means the homeowner must pay a yearly service charge for common areas and a ground rent. Ground rent is a traditional fee to ‘rent’ the land the property is on, and it should be nominal. However, some new-build leasehold homes include ground rent clauses that would double the charge every ten years. This means that a ground rest costing a nominal £250/ year now could, in theory, amount to £8m in 150 years! These clauses are often deeply buried within contractors, with many people not realising they’re even there.

After many years in the industry, I believe there has been a hidden agenda by some by the sale of 125-year (or less) leases, due to the fact that leases with less than 60 years become unsellable and need to be renegotiated.

New leasehold system

The government announced the culmination of their consultation into leasehold practises back in July 2017. Following its results, they announced that they will be banning new houses being sold as leaseholds, as well as reducing often unfair ground rents to zero.

This decision will see more of a balance between developer and buyer. The government has also said that they plan to simplify the process for existing leasehold owners to buy a freehold share – however, they haven’t yet said how this will work.

What’s changing?

The changes will include two key factors for buyers of new-build properties from developers:

  1. Leasehold new builds will be banned. There are exemptions for so-called ‘necessary’ circumstances. These include new-builds sold through shared ownership, or houses built on land with ‘specific restrictions’.
  2. Ground rents on new long-leased houses and flats will be zero.

In addition, the government will be ‘strongly discouraging’ developers from using Help to Buy Equity loans on leasehold houses/flats.

How does it affect current leaseholders?

The government has pledged to work with the Law Commission to simplify and improve the freehold purchasing process. They have said that they intend to make it ‘easier, faster and cheaper’.

‘Clear support’ is also set to be offered regarding redress for anyone facing onerous ground rents or permission fees deemed to be excessive. Leaseholders and freeholders will be granted the same rights to fight what they consider to be any unfair service charges.

Why is the government reforming leaseholds?

There are a few different reasons why any potential homebuyers and existing leaseholders have been had to deal with what the government has deemed ‘unfair practices’. The government have specified the following three areas as the main drivers behind the changes:

  • Ground rent clauses

Some new-build leaseholds contain a clause that specifies their ground rent charge must double every ten years. This could mean the owner will find that their property is effectively worthless when they want to sell in the future.

  • Selling freeholds to investment companies

Some developers have been selling freeholds to investment companies, without informing affected leaseholders. While this doesn’t break the law, it has meant that some homeowners have been faced with high ‘permission fees’ if they want to make changes to their property. On occasions, it’s been found that people are also being quoted excessive amounts to buy their freeholds.

  • Mortgage complications

In 2017, Nationwide refused to give mortgages on homes that have unfair ground rent terms. They were the first mortgage lender to do so, and while this does protect new buyers, it means current owners might find it very difficult to sell their homes if they have ground rent clauses.

These reasons all contributed to the consultation with its aims to reduce ground rent to either nothing or to a transparent figure. The communities secretary said: “It’s 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.”

We’re pleased to see these changes, as it will help to redress the balance in the housing market, which is part of our ethos at Fortitudo Property.

– Richard Carr