Over the last few years there has been a significant increase in the number of new homes sold with leaseholds. This effectively means that the property buyer does not own the property out right and is forced to pay a ground rent each year. Some of these ground rent agreements increase payments in line with inflation while others double the ground rent every 10 years. When you bear in mind an initial ground rent could be in the region of £250 a year it can very soon become a problem. So, what is the government going to do to combat the increasing problem of leaseholds on new build homes?
Historically flats have been leasehold and this has not necessarily caused a problem although at this moment in time one in five private homes in the UK is leasehold. This equates to around 4 million homes in total although 2.8 million of these are flats leaving around 1.2 million houses. This figure also includes 167,000 detached homes and this income is certainly starting to mount up for construction companies around the UK.
It is getting towards the situation whereby the increase in ground rent payments is impacting an owner’s ability to sell a property. There is a growing belief that those acquiring new build properties with leaseholds are being exploited although from a legal standpoint the process is perfectly above board.
Changing the system
Theresa May is looking into not only ending the use of leasehold arrangements with new homes but also introducing a minimum lease duration for flats. The idea is that this will give leaseholders more security in the longer term and open up more financial options for potential buyers. It is ironic that the UK government is now looking to challenge leaseholds on new builds when more than 10,000 new leasehold houses have been sold through the successful “Help to Buy” scheme.
Official figures suggest that there were 5000 of these particular types of properties sold through the scheme in 2016 alone. How can it be that a UK tax funded project would appear to be playing into the hands of large construction companies who have opened up a new income stream of between £300 million and £500 million a year from ground rent payments?
It is intriguing to see that the property market becomes the focal point for politicians as we approach an election. All parties have had numerous opportunities within the House of Commons to bring up issues such as leaseholds on newbuilds but it is only when they require your vote that they seem to focus their minds?
Aside from the need for new legislation to outlaw leaseholds on newbuilds there is perhaps a need to further educate the wider public on these issues. The vast majority of newbuild buyers are probably unaware of the growing problem of ground rent payments which will increase into the future. Hopefully the recent publicity and press comment will make buyers more aware of the situation and prompt them to ask more in-depth questions before they sign on the dotted line.