The Leasehold Ground Rent Scandal – Your Key Questions Answered

There has been much consternation over the last 12 months at the exorbitant ground rent and charges affecting many purchasers of leasehold property. In this article, we answer some of the key questions being asked and, in so doing, explain the developments so far and the options available for those affected.

What is leasehold property?

Leasehold is a common form of home ownership in the UK, where the owner of the property is granted exclusive possession for a fixed period of time. The duration of the leasehold can vary from one lease to the next, although terms of 99 years, 125 years and even 999 years are not uncommon.

All leaseholds are derived from the freehold interest in the same property. Unlike the leasehold, the freehold is not time limited and will survive the expiry of the leasehold.

Usually, different legal entities own the freehold and leasehold interests in a property and their rights over and obligations to one another will be recorded in and governed by the terms of a lease. Such obligations invariably include the payment of ground rent by the leaseholder to the freeholder.

What issues have arisen?

A number of issues have arisen for leasehold owners. These derive from the onerous terms upon which many property leases have latterly been drafted and sold by freeholders. Such terms have been found to include:

  • Significant periodic increases in the ground rent payable to the freeholder
  • Excessive charges by the freeholder for consenting to alterations to the property
  • High administration charges imposed by the freeholder for dealing with issues relating to the lease

In many cases, leaseholder owners were not made aware of the existence or effect of these terms, either by the vendor, the vendor’s estate agent or their own conveyancer. Further, these terms are often only discovered some time later, when the leaseholder wishes to alter or dispose of their property.

How has the problem occurred?

Many of these onerous terms have been introduced into leases by developers seeking to leverage further profit from their residential schemes. However, it appears that a number of factors have combined to make the inclusion of such terms all the more possible. These include:

  • The failure by estate agents acting for developers to make clear whether the properties they are selling are leasehold or freehold
  • The increasing use of inexperienced and low skilled conveyancers who fail to identify or appreciate the significance of discreet terms within lengthy conveyancing documents
  • The failure by some conveyancers, frequently retained on the recommendation of the developer, to clearly report onerous terms to the leasehold purchaser
  • A lack of understanding, particularly amongst first-time buyers, of the implications of buying a leasehold, rather than a freehold, property

What are the implications for leaseholders?

For many leasehold owners, the effects have been devastating.

In some of the worst cases, leaseholders have been unable to sell their properties. Indeed, this has become a reality for an increasing number of leasehold owners as news of the scandal has spread, putting more and more purchasers, conveyancers and lenders on their guard.

In such cases, leaseholders have been left with the prospect of grounds rents exceeding £100,000 per year before the expiry of the term of the lease. Frequently, this is combined with inflated demands from freeholders, for tens of thousands of pounds, for the acquisition of their interest.

The fact that many freeholds have been sold on by developers to speculators and investors seeking returns on their growing freehold portfolios, has only made the situation more upsetting for some and more difficult to resolve for others.

How many homeowners are affected?

The Department for Communities and Local Government has estimated that there were around 4 million leasehold homes in the private sector in England in 2014-15, about 21% of the total private-sector dwelling stock.

According to Land Registry data records, around 27% of all residential property transactions in England and Wales in 2016 were leasehold, up from around 20% in 1995. Significantly, the proportion of new build houses, where the issue of excessive ground rents has been particularly acute, sold as leasehold has also increased, from 7% in 1995 to 15% in 2016.

While not every leasehold property will be affected, the scale of the problem is worrying. An estimate provided by a parliamentary campaign group, the Leasehold Knowledge Partnership, suggests that around 100,000 homeowners may now be adversely affected.

What is being done to resolve matters?

In response to public criticism, vociferous media attention and, perhaps, rising concern over government intervention, some developers are taking steps to mitigate the impact of more onerous leasehold terms.

Taylor Wimpey has set up a Ground Rent Review Assistance Scheme, for which it has reportedly made a £130m provision. Under the scheme, which is entirely voluntary, the developer says it will help its customers convert their existing leases to alternative lease structures, incorporating materially less expensive ground rents. However, the scheme is only available to customers who own homes (houses or flats) which have a lease with a ten-year doubling ground rent clause and who purchased their home directly from the developer. In addition, Taylor Wimpey has committed to ensuring that, except in a small number of cases, all of its future property sales will be on a freehold basis.

Another large developer, Countryside Properties Plc, has recently announced that it is seeking to re-purchase a number of the freeholds that it sold to third party investors, with a view to releasing homeowners from ten-year doubling ground rents.

However, not all developers have committed to mitigating and/or eradicating the practice of selling new build properties on leaseholds and the government is now evaluating the situation. A consultation (Tackling unfair practices in the leasehold market) into the practice has been initiated by Sajid Javid, the Secretary of State for Communities, which required submissions from all interested parties by 19 September 2017. While this has been viewed as a positive development, the fear for those already affected is that any intervention by the government will be prospective, not retrospective.

What can you do if you’re affected?

If you are the owner of leasehold property and adversely affected by onerous terms within your lease, there are a number of options potentially open to you. Which will be most appropriate is likely to depend on a range of factors, including the type of property you own, the nature and severity of the issues affecting it and, as is often the case, your own personal circumstances. The options include:

  • If you qualify, participating in any remedial scheme offered by the property developer
  • Campaigning, individually or collectively with other affected residents, against the developer who sold you your property in the hope of securing its agreement to a variation of your lease
  • Initiating legal proceedings in the first-Tier Tribunal (Property Chamber)
  • Exercising your right to buy the freehold interest (a process called ‘enfranchisement’) under the Leasehold Reform Act 1967 (for houses) or the Leasehold Reform, Housing and Urban Development Act 1993 (for flats)
  • Pursuing a professional negligence claim for damages against the conveyancer who acted for you on the purchase of your property
  • Doing nothing and awaiting the outcome of any government reform

In considering your options, you should bear in mind that there are strict time limits for pursuing a professional negligence claim and that your right to do so may be lost as a consequence of delay.

You should also bear in mind that as a claimant in any professional negligence claim, you are under a duty to take reasonable steps to mitigate any loss you have suffered. While the precise scope of this duty will depend on the circumstances of your case, it may well include, for example, participating in any voluntary scheme offered by the original property developer if you qualify.

Where can you turn to for more specific legal advice?

We would be happy to advise you on the legal options available in your particular case and to pursue any appropriate mitigatory or compensatory action on your behalf.

With PNC Legal you benefit not only from our extensive experience of acting on professional negligence claims, but also from the support we enjoy from specialist property solicitors, through our association with Keystone Law.

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