How big an issue are leaseholds when it comes to the property market? In its annual survey, the HomeOwners Alliance reports that 50% of UK adults think current system of leaseholds and freeholds as a serious problem.
Now the government is planning to ban leaseholds on new-build houses in England, and reduce ground rents.
New homebuyers can find themselves trapped by ever increasing ground rents. There has been the notorious case of a Taylor-Wimpey apartment valued at zero only six years after it was built because of its spiralling ground rent; and the company had introduced 999 year clauses – now curtailed – for some of its new builds which allowed rents to double every 10 years.
With the UK property market in a precarious position, are ground rents damaging its health?
Turning Dream Homes into Nightmares?
Some developers have been known to are treat leaseholds as money-grabbing, opportunities, buying up freeholds and doubling the ground rents payable by the leaseholders.
Moreover, there are plenty of situations where freeholds are sold on to other companies who then try and pressure the leaseholder to buy them out, with the threat of considerable ground rent increases.
With the call for more new builds to help combat the housing shortage in the UK, could this leave more leaseholders vulnerable to hikes in ground rent?
The HomeOwners Alliance suggests replacing leaseholds with commonholds, like the system used in the US for condominiums. Under a commonhold, everyone buying an apartment gets a freehold which includes a common responsibility for the building.
Are There Advantages to Leaseholds?
The leasehold system should, in theory, provide certain advantages for both tenants and landlords, depending on the specifics of a situation.
For example, leaseholds have traditionally been better for people seeking short-term residential needs. Also, in residential blocks, leaseholds mean that the landlord undertakes to maintain common parts, usually through a management company, covered by certain covenants in the Agreement.
However, such covenants can also be a burden on leaseholders, imposed on them to repair or contribute to maintenance of common parts.
In law, leaseholders have rights to prevent the landlord from taking advantage of them financially, but the current issues surrounding ground rents suggest that the system is no longer working for the benefit of leaseholders.
What Has Gone Wrong with Leaseholds?
The leasehold system has existed for a long time in England and Wales, and has usually applied to blocks of flats. However, the recent trend for new-build houses to be leasehold has led to a significant rise in the number of leasehold properties in the UK.
The real problem is clauses in these leaseholds which allow for dramatic rises in ground rent – fees that are levied on top of service charges for upkeep of common areas.
The government’s proposals to ban leaseholds for new developments will undergo a consultation period, which will determine whether they then go forward to become law.