A worrying trend is emerging among housing estate developers with the sale of freeholds to investment groups or companies as an income generating enterprise.
The government reports that around 6,000 new builds were sold without the freehold during 2015.
Where freeholds once had little value, and ground rent charges were notionally around £5 – £25 per year, in more recent years, discreet clauses have begun to appear in contracts, in some instances claiming ground rents upwards of £300 per year, which then double every 10 years. This makes buying freeholds an attractive investment opportunity.
Whilst 999 year leases may not seem an issue initially (the majority of flats are leasehold), as they reduce they become less appealing to buyers. Many solicitors are discouraging their clients from buying homes without the freehold.
In addition, if the home-owner does not pay their ground rent, under the terms of the contract, their home may be seized without compensation.
As a result, many have tried to purchase their freehold, which would previously have been valued at little more than a few thousand pounds. Instead, however, they are finding them unaffordable due to the prohibitively high price being charged by the investment company, keen to recoup the lost future income.
One such company, E&J Estates, who has purchased freeholds from Taylor Wimpey, purportedly wanted £32,000 for the freehold of a £155,000 new build bought in Ellesmere Port in 2009. The same company required £40,000 from another individual – almost a third of her home’s value. Without the freehold, both owners have been advised their homes may be ‘un-saleable’.
Unsuspecting buyers fall into the trap of escalating ground rent charges ‘hidden’ within the small print of large leases. Whilst at first, the costs look reasonable and affordable, after each 10 year period, the ground rent doubles. As many people sell and move home within the first 10 years of ownership, this may not unduly worry them, but it is this clause that makes owning the freehold extremely valuable to a third party.
The MP for Ellesmere Port and Neston, Justin Madders calls the situation “morally indefensibleâ€. He says, “I have had a number of constituents contact me, saying they were aware at the time of purchase that the freehold was extra. However, they didn’t know the original developer sold the leaseholds to private investors who have ruthlessly exploited the law to line their own pockets.
“The prices they have been quoted to buy the freehold have rocketed beyond any reasonable sum people can afford. I have found constituents are unable to afford the fees being quoted and there are extortionate charges associated with obtaining permission to alter the property. Just over £2,500 was quoted for permission just to build an extension.â€
It is clear from the promotional materials and brochures produced for the developers that little or no mention is made of the situation regarding the leasehold or ground rents. Furthermore, many potential buyers claim they were not advised until late in the buying process that the property was leasehold. Those who asked if they could buy the freehold were told by the developers that they could not for the first two years after purchase – by which time, it has been sold on by the developer to a third party or parties as an investment. This is being seen by many – including the Leasehold Knowledge Partnership support group – as yet another example of the diminishing wealth opportunities for ordinary people at the expense of the already rich.
Consequently, an all-party parliamentary group, Chaired by Labour MP Jim Fitzpatrick and Tory Sir Peter Bottomly, is going to be looking into the issues concerning leasehold properties this month.
Justin Madders is calling for a complete ban on leaseholds for housing estates. “It is clear this system is being abused to drive huge profits at ordinary, homeowners’ expense. There is no need for there to be leasehold properties, particularly those on an estate where the properties are mainly detached houses.
“They need to be banned – it may be a convenient way for developers to get extra profit from their building work, but once they get in the hands of these private equity companies the profit motive overrides any considerations that there are real people living in their homes, who are being asked to stump up eye-watering sums.â€
The outcome of the all-parliamentary group on this issue will be eagerly awaited by those looking to buy new homes from developers.
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VY
3-Nov-2016