Exorbitant ground rents could be coming to an end because of a new pledge by developers, as frustration grows over 'fleecehold' contracts.
Leaseholders of more than 40 housing developers could be able to escape rip-off ground rents, thanks to a new initiative.
A Government-backed 'industry pledge' has seen leading developers agree to end exorbitant ground rents, where fees could double every few years, in some cases making the property unsellable.
Specifically, signatories to the pledge have agreed to: “Identify leases within our portfolio which contain a clause whereby ground rent doubles more frequently than every 20 years, contact leaseholders to inform them and offer to amend to one linked to RPI.”
New leaseholders will not be offered ground rents that double in under 20 years. The Government will also make it easier for leaseholders to take landlords to court, by preventing landlords clawing back legal fees through ground rents.
Whilst many of the largest developers have signed up (you can find the full list here), some have not, including Berkeley Group.
The pledge falls some way short of MPs' recommendations that ground rent be limited to 0.1% of the value of a property or £250, regardless of RPI changes.
If you're an existing leaseholder or looking to buy a home, therefore, it's vital you know what you're signing up to.
What to check for in a leasehold agreement
If you can afford a house, it should be freehold. If it isn’t, you probably shouldn’t buy it – leasehold houses have been the source of much of the negative attention about leasehold in recent years.
But if you’re buying a flat, you’re going to have to buy leasehold.
Don’t wait until you’ve had an offer accepted and are halfway through conveyancing to get your hands on the lease.
Ask the agent or the seller for a copy before making an offer – if they can’t or won’t provide one there may be something they are trying to hide. You can also request one from Land Registry for just £7.
Once you have the lease, check the ground rent.
One issue that has caused a lot of problems in recent years is ground rent that doubles every 10 years or is increased in line with the Retail Prices Index (which is generally the highest rate of inflation).
Many mortgage lenders are now refusing to lend on such flats and some have also stopped lending on properties where the ground rent is more than 0.1% of the property’s value.
The other big thing to look out for is the length of the lease.
If it is 82 years or less, you’re likely to have to pay a large amount to extend it in the not-too-distant future. There is a statutory route to extend leases, but you cannot use this until you’ve owned a flat for two years and if the lease drops below 80 years.
The cost rises dramatically because freeholders are entitled to something called ‘marriage value’.
Calculators such as this one provided by the Leasehold Advisory Service can help you work out the likely cost.
Sebastian O’Kelly of Leasehold Knowledge Partnership, a charity that represents leaseholders, adds that there are a couple of other clauses to watch out for.
“Some leases ban subletting so if you have to move for work and you need to rent out your home you might not be able to.
“If you really want to have a pet in your flat, check the lease because most leases will ban pets.”
Share of Freehold
If you live in a built-up city filled with flats, you probably know at least one person with a tale of woe about poor management and ever-increasing service charges.
But problems are less likely if residents themselves control the building, says O’Kelly.
“The best sites are those controlled by the residents because they have the lowest service charges and they are the most harmonious.
“All you have to do is get on with your neighbours in agreeing how the block is run and you are OK.”
Controlled by Residents doesn’t necessarily mean you will personally need to find time to arrange lift servicing or window cleaning, but more likely that leaseholders have appointed a managing agent that takes instructions from them rather than from a freeholder.
One structure that allows leaseholders to do this is 'share of freehold'.
Generally considered the best type of leasehold ownership, this means that as well as owning the lease to your flat, you’ll also own a portion of the building along with the other leaseholders.
Usually, there’s no ground rent and you don’t have to pay to extend your lease.
Right to Manage
Another way residents can be in control is via a Right to Manage setup.
This means leaseholders have collectively formed a company and taken over the freeholder’s management responsibilities under the lease.
The company will manage the building in a similar way to share of freehold, however, the freeholder will still be entitled to payments for ground rent and lease extensions.
Similarly, there may be a Residents’ Management Company set up under a Tri-Party Lease, meaning leaseholders have had responsibility for the block’s management since the development was built.
But watch out – a tri-party lease that names a company in which flat owners are shareholders is good.
A Tri-Party Lease that instead names a specific management agent as having control is bad – this means it has been granted the right to manage the building in perpetuity and while not impossible, it’s very difficult to get rid of such an agent.
Make yourself heard
The way the block is run is likely to be a major factor in how happy you are in the flat and how easily you can sell it on later down the line.
For this reason, O’Kelly says buyers should not be shy.
“You are buying an asset in a communal property so speak to other members of the community because if they are all unhappy you don’t want to buy it.”
If you buy into a building that is badly run, there’s always the chance you could convince others to club together with you to buy the freehold or obtain Right to Manage.
But if you can buy a property where such an arrangement already exists, you will save yourself a lot of time and angst.
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