New-build leasehold property trap

Onerous and complex leasehold terms could have a major impact on a generation of home buyers.As the number of newly built houses and flats sold on a leasehold rather than a freehold rises rapidly, thousands of people have  been left to deal with arrangements made between house builders and the purchasing investors.

In Britain there are around 1.8 million leasehold properties, with a large number of places in Manchester and London being left with no freehold ownership at all in the wake of recent developments.

However, some the terms they include have now been highlighted as potential hurdle for property owners, especially in regards to selling in the future.

In a bid to tackle issues such as this, the Government is expected to release a market white paper in February.

Traditionally, the majority of house were sold under freehold, whilst flats were leasehold. Owners are exposed to the whims of the freeholder in the latter situation, putting them at a disadvantage.

Whilst this was previously an issue for flats only, houses now being sold with leases too means that home owners are also affected.

Bellway, Taylor Wimpey and other homebuilders subsequently sell on this freehold as a supplementary source of income.

Sometimes, certain provisions can be included within these leaseholds which can create problems for homeowners, such as rent doubling every ten years. This was the case for a group of Taylor Wimpey home owners, which resulted in their property value falling. The home builder has now ceased in selling homes with terms such as these.

Due to third party firms purchasing large quantities of freehold however, leaseholders are still faced with problems. A range of investors are often drawn to the growing income from ground rents, which is usually linked with inflation.

Current legislation states that homeowners have a legal right to buy out their freehold after two years, but can be held to ransom by figures set far above those quoted by the original builder.

This problem was recently experiences by Mr and Mrs Kendrick, who purchased a home on a new build estate in Ellesmere Port.

It was initially understood that to buy the freehold from the builder Bellway, the couple would have to pay an estimated 30 times the annual ground rent – around £4,500.

The couple asked for a quote after a couple of years had passed and found that the freehold had been sold on. It had been bought by a company called Homeground, who offered ground rents as investments through a portfolio known as “Adriatic”.

The cost of the freehold from Homeground was £13,350 or 89 times the £150 a year ground rent. The company refused to disclose how the figure was calculated.

Expressing a fear that the couple needed to act swiftly, Mrs Kendrick highlighted her shock at the cost.

“If I pay the £13,350 that’s a hell of a profit for holding the freehold for less than 12 months. I feel I have to do something now, it’s only going to go up – it’s just extortionate.”

Commenting on the need to evaluate the process was Justin Madders. The MP for Ellesmere Port and Neston stated that he has been pressing the Government on the issue.

“There is no need for the properties in my constituency, which are almost all houses, to be sold on this basis.

“I’m hoping either through Government legislation or a general reappraisal of this by builders the practise is stopped.”

A Homeground spokesman stated that the couple could give a lower offer on the freehold, which would then be considered by the investor.

He then went on to comment on the managed freeholds, as well as the process where a price agreement cannot be made.

“The investors in the freeholds managed by Homeground hold these assets as part of their long term investment strategy. They ascribe a value to each property and would only wish to sell it at that level. There is a tribunal process which a leaseholder can turn to if a mutually agreeable price cannot be reached.”

 

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