Leasehold law headache continues

High rise buildings in Newham, London
High rise development around Newham, London

Barclays Bank has reignited the debate on unfair leasehold practices, after refusing to lend against a high profile development in Stratford, in the London Borough of Newham. The main cause for concern were the ‘under leases’ that the developer was selling to prospective buyers.

There will soon be a new government bill aimed at tackling the unfair practices carried out under the complexities of leasehold law. Practices include excessive service charges from whoever owns the land on which these leasehold properties have been built.

This article answers some of the questions and concerns you may have about leasehold property.

How does the leasehold system work?

Currently, there are estimated to be around four million leasehold properties in the UK; of these, 2.6 million are flats and the rest are houses. The leasehold dwelling or building plus the land that it stands on are all owned by the freeholder who grants a lease for a set period of time, varying from 99 years to 999 years. Ownership of the property reverts back to the freeholder when the lease ends. The freeholder charges the leaseholder ground rent during that period and can pass on maintenance costs such as yearly service charges. The details are usually set down in the lease so that both parties know what is expected.

Who are these freeholders?

New specialist freeholders have emerged who make their money from annual ground rents by charging a levy for property maintenance and charging fees for giving permission to do things such as building extensions.

What sort of issues might arise?

It has been speculated that some freeholders are exploiting legal loopholes that enable them to extract more money from leaseholders. Service charges, in particular, can be a battleground, with leaseholders complaining that freeholders frequently raise charges on anything from buildings insurance to grounds maintenance. Some freeholders have been accused of doing this in the hope that leaseholders neither have the time nor the money to challenge them through the courts.

There is a widely condemned practice of developers selling new build homes as leasehold, then retaining the freehold of the property. An investigation by consumer group Which? revealed the practice of some developers of selling on property freeholds to third-party companies, who then try to hike up charges for the management of the developments. Citizens Advice highlighted a recent case that came before court in which an initial service charge that started at £90 per annum was subsequently increased by 10% each year. This would mean that, by the end of a 99 year lease, the annual payments would have increased to a whopping £1 million.

What other problems have people faced?

The Which? report found some extreme examples – such as £2,500 for permission to build a conservatory, £252 to own a pet and £60 to install a doorbell. Another area for concern is over who pays the bill in leasehold blocks of flats, where safety improvements are required in the wake of the Grenfell fire. Safety has really stepped up in light of such incidents, and rightly so, but the question is who should foot the bill for the improvements that have been identified.

Re-cladding and retrofitting sprinkler systems is costly. Leaseholders in one block in Croydon, South London, were told they would face charges of between £13,300 and £31,300 per flat to cover the cost of safety works. Since then, the developer of the complex, Barratt Homes, has agreed to pay for the recladding.

Why is the government taking action now?

The government says the bill is part of a drive to crack down on unacceptable practices by freeholders, aimed at altering the balance of power in which the existing rules load the dice in their favour. Among the changes proposed are measures to make it simpler for leaseholders to buy their freehold, and a ban on the charging of ground rent for longer leases.

Gareth Shaw, a money expert at Which? says, “We welcome the reforms to protect homeowners. However, it remains to be seen if the plans will benefit leaseholders who have lost out due to these unfair practices.”

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