Leasehold does have issues, but could banning it create other problems?

Scotland has already abolished leaseholds, and housebuilders in Wales this March agreed to stop offering homes for sale on a leasehold basis unless “absolutely necessary”.  The Welsh government has secured agreements from major building firms such as Taylor Wimpey, Bellway, Barratt, Redrow and Persimmon for houses and flats that will limit the use of leaseholds on Help to Buy and other new-build developments.

In December 2017, Sajid Javid, then communities secretary, announced a ban on leaseholds for most new-build houses in England in hope of creating a fairer system, saying it is “unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms”.

Javid said that it is clear from the “overwhelming response from the public that real action is needed to end these feudal practices” and that the measures the government is putting in place – to come into force in 2019 – will help create a system that works for consumers.

There are certain cases where a new-build leasehold house is justified – for example, if it is being sold at a reduced price through a shared ownership scheme – but in the main, there is no reason to sell houses as leaseholds. 

This new legislation should prevent the number of leasehold houses from rising and will prevent the sale of new-build leasehold dwellings unless entirely necessary. But while the legislation is obviously good for consumers, it is more complicated than it first appears.

For example, as part of its housing plans, the government is trying to promote sustainable buildings, which often includes the use of communal/district heating systems, which may well require a leasehold structure. By looking to ban leasehold, this may cause complications around these types of sustainable developments.

Also, many property developers rely on this income they receive from ground rents, and in losing it will have to recoup the loss somehow – most likely by passing on rising building costs to homebuyers by pushing house prices up.

It could also create what has been termed a “double-tiered” housing market. A ban on the sale of new properties as leaseholds will make new-build freehold houses a lot more desirable than similar existing leasehold properties but doesn’t help the thousands of people trapped in existing rip-off leases. The government has said it will do all it can to make it easier and cheaper for leaseholders to buy out their freehold, but there is no guarantee this will happen.

There are certain cases where a new-build leasehold house is justified, for example, if it is being sold at a reduced price through a shared ownership scheme – but in the main, there is no reason to sell houses as leaseholds.

That is why the subject of leaseholds – and escalating ground rents on a 3 or 5-year pattern on new builds - is such a controversial subject. Some of these ground rents can double each time making them extortionately expensive after 15 or 20 years.

Some homeowners are unaware of the associated costs with a leasehold when they buy their properties, which can cause huge problems down the line.

But even those who are aware can find themselves in hot water. For example, many will buy their leasehold property with the intention of buying the freehold from the developer when they can, but then find that the freehold has been sold to a third party who then look to sell at a figure substantially higher than the original cost.

There is also the issue surrounding the cost of renewing or extending a lease, which can be prohibitive for the same reasons.

Homeowners who have leasehold properties will struggle to remortgage and when they want to sell, may find it difficult to find a buyer prepared to take on a short lease with the financial uncertainty that it brings.

The Government has said it will do all it can to make it easier and cheaper for leaseholders to buy-out their freehold by making ground rents on existing leasehold properties being set to zero, but there is no guarantee this will happen as housebuilders don’t necessarily still own the leaseholds – many of the owners are based offshore making them difficult to hold to account.

So while it is clearly a complicated issue, and banning leasehold could potentially have some negative impacts, the situation clearly cannot go on as it is.

There will always be leasehold tenure, due to common parts and ground that flats and apartments are built on, but there is no justification for these ground rents to escalate in the way they have been. 

And the cost of renewing or extending a lease should not be set at such a level that it is unaffordable. 

There are currently houses that are being built as leasehold that don’t need to be, so this legislation will be hugely beneficial in these cases, it just remains to be seen what the wider impact will be on the housing market as a whole.