The Communities Secretary, announced in July they were beginning an eight week consultation on plans to ban the sale of leasehold houses and restrict the leasehold form of ownership to properties with shared services. The plans also include cutting ground rents to as little as zero.

If the property you own is freehold you will own the building and the land it sits on. You will be the ‘freeholder’ and will be responsible for the repair and maintenance of the building.

A leasehold interest in land can be created out of a freehold title by the granting of a lease. If you purchase the leasehold interest you are effectively a tenant of the building and the freehold title will be owned by the landlord (freeholder). The lease will run for a certain term (usually ranging from 99 years to 999 years) and if no extension is granted, once the term has come to an end the property will return to the freeholder. The lease will usually provide that ground rent is payable to the landlord and confirm the arrangements regarding the repair and maintenance of the property. Quite often a service charge will be payable by each of the leaseholders in the building to contribute towards the repair and upkeep of the whole building and any common areas. The Lease will also usually contain a list of ‘restrictive covenants’ i.e. things that you cannot do as owner of the property.

It is understandable that leasehold would be the best form of ownership of a flat. The Landlord (freeholder) will usually be responsible for the repair and maintenance of the whole building and the common areas within the block of flats. The Lease will also usually require that the Landlord or Management Company (if there is one) puts buildings insurance in place, payment of which will be recovered from the leaseholders by way of the service charge. But why have leasehold houses? The Guardian reports that the Department for Communities and Local Government Statistics estimate there were 4 million residential leasehold dwellings in England in the private sector in 2014-15 and of these 1.2m were leasehold houses. Developers are being accused of selling new build leasehold houses as a way of increasing profits. They can sell the leasehold homes and then once the development is complete, they sell the freehold, usually to an investment company. There are concerns that first time buyers are being targeted to purchase these properties and they do not fully understand the implications of being a leaseholder.

If you own a leasehold house, an annual ground rent will be payable to the landlord. The lease will usually contain a covenant that if you want to make an external alteration or addition to the property, such as an extension or conservatory you will need the prior written consent of the landlord. Of course, there will usually be a fee for granting such covenant consent. A maintenance charge may also be payable for the upkeep and maintenance of private roads or common areas on the estate. Leaseholders can apply to purchase the freehold at a later date but this will usually cost several thousand pounds.

When you come to sell your leasehold property a Leasehold Information Pack will be required by the buyer’s solicitors and the landlord or management company often charge a few hundred pounds to provide this. On completion, the buyer’s solicitor will need to serve a notice on the landlord that they are the new owner of the property. The landlord’s fee for receipting this notice is on average around £100m, although this can be higher. Quite often the lease will require that notice is served on both the landlord and the management company, so there are two sets of fees payable. If the buyer is required to enter into a Deed of Covenant or become a member of the management company, the landlord can charge fees for dealing with the Deed of Covenant or arranging for new share certificates to be issued. This leaves the buyer with a substantially higher bill for purchasing the property than what was envisaged at the outset.

There has been scandal over spiralling ground rent clauses included in leases. The Communities Secretary has stated “Enough is enough. These practices are unjust, unnecessary and need to stop. Our proposed changes will help make sure leasehold works in the best interests of homebuyers now and in the future.” The plans to ban leasehold houses and restrict the ground rent on leasehold flats to a peppercorn have been welcomed by campaigners. However there is concern over what will be done for existing leaseholders. The Communities Secretary has confirmed that he expects builders to compensate those affected. Taylor Wimpey have advised that £130 million has been put aside to help customers who have entered into leases where the ground rent doubles every ten years. They have offered advice on their website as to how customers can apply to have the doubling ground rent clauses amended by entering into a Deed of Variation.

The Law Society in their response to the government’s consultation have suggested that a number of non-legislative steps could be taken in order to put an end to these practices including enlisting the help of mortgage lenders and limiting government assistance such as Help to Buy Equity Loans on developments which contain unfair terms. The Law Society’s view is that houses should be sold on a freehold basis, unless there is a good reason for selling them as leasehold, such as shared services. This would leave the problem of defining a ‘good reason’.

It is worth noting that there are an increasing number of new build freehold properties with the same characteristics as leasehold houses. Although the owner will own the land outright, the document that transfers the property to the purchaser (transfer deed) can contain a large number of restrictive covenants, similar to that of a lease. In particular, a covenant not to make any external alterations or additions without the consent of the transferor (developer) or the management company. Management companies are set up to manage the estate and the transfer deed can provide that variable rent charges are payable for the upkeep of the common areas on the estate. More frequently, the transfer deed provides that a restriction is to be added to the title of the property. This restriction will usually stipulate that there can be no sale of the property without a certificate signed by the management company that certain provisions in the transfer deed have been complied with (usually that rent charge has been paid up to date etc). Again, there will be a fee payable to the management company for producing this certificate. As discussed above, any buyer’s solicitor will need to be provided with these details prior to exchanging contracts and the Management Company will charge for providing this information. Ascertaining this information can delay the conveyancing process to the frustration of both sellers and buyers.

Drafting the legislation to cover all these issues will be complex and take time, however it is clear that reform is necessary to restore faith in the leasehold system. For further information please contact Sarah McCall on 0191 261 0096 or by email at sarah.mccoll@markswattsmorse.co.uk.