Nationwide takes on the ground rent scandal

The ‘ground rent scandal’ has caused some shocking headlines in recent months:

  • Taylor Wimpey sold our freehold – it will cost £40k to buy it back
  • Flat owner reports being trapped in property valued at £NIL just six years after being built
  • £1k fees to freeholder for permission to build extension
  • £35k quote to buy freehold on Bovis house built a year ago
  • Solicitors could face £578m in claims for professional negligence following leasehold ground rent scandal

The Telegraph recently illustrated how a ground rent starting at £250 could escalate to £69 trillion towards the end of one property’s 999 year lease.

An estimated 40 per cent of new homes built by several of the UK’s big builders are sold on leasehold tenure. The failure of some estate agents and solicitors to bring potentially ruinous ground rents to the attention of purchasers has been widely criticised, but Nationwide Building Society has made a surprise move to protect its members.

As the world’s largest building society and one of the UK’s top three mortgage providers, Nationwide has announced that it will not lend on new build properties with escalating ground rents – a move that has been roundly applauded by property professionals.

Nationwide has reacted to the practice of including leasehold clauses which allow the application of multipliers over short intervals by linking the escalation of ground rent to a verified index, such as the Retail Price Index. The maximum acceptable ground rent will be capped at 0.1 per cent of the property’s value. It will also impose a minimum lease term for new build transactions of 125 years for flats and 250 years for houses.

Ground rents are not the same as service charges – they do not offer anything in return – but they are a valuable commodity to those in the business of purchasing them from the big developers.  There is no justification for houses being sold as anything other than freehold and there is a legal structure in place that would enable flats to be sold as commonhold, but properties on new build estates are still being sold as leasehold.

Nationwide’s spokesman said: “We are doing this to address the practice of using leasehold tenure where this is unnecessary, particularly for new-build houses, and to ensure that onerous leasehold terms, including ground rents, are properly considered and controlled in order to safeguard our mortgage members. Nationwide is taking a proactive, leading position on this issue to address a significant risk facing our members and to challenge what we believe to be poor practice in the new-build market.”

Taylor Wimpey has announced that it has set aside a £130m compensation fund for those caught in the ‘ground rent trap’, but the cost of making a legal challenge may make it difficult for some leaseholders to obtain a fair ruling. Peter Bottomley MP has criticised one company which backdated the terms of its lease through a deed of variation to 1961 – when the property was built. The new clause doubled the ground rent at Blythe Court, Coleshill near Birmingham, every ten years. So from an initial £250 in 1961 the ground rent for the £85,000 property increased to £8,000 by 2011, when it was purchased by a new owner who was not aware of the clause.

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