The hidden costs of leaseholds

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Buyers of leasehold properties are being warned to watch out for spiralling ground rents and hidden costs after a spate of investment properties were deemed to have been worth nothing due to the prohibitive cost of purchasing the freeholds and excessive ground rents. A special investigation by The Guardian revealed that a host of property developers, mainly situated in the North East, were selling properties with such heavy ground rents that the investors who bought them found their resale value was zero.

Always read the fine print

The issue arises because leasehold buyers find themselves trapped by the ground rents because they don’t own the freehold to the property. Developers are selling houses, which in the past would have been freehold properties, with such long leases (999 years plus) that those buying them feel as though they’re in the same position as those who own a freehold property. But within the fine print are details of ground rents, which, although initially reasonable, double each year, crippling the property’s value and rendering it unsaleable. When the leaseholder reverts to the property company for assistance, they find the freehold has either been sold on or is being offered to them at a rate they can’t afford to buy.

Spiralling Costs

One Guardian reader told the newspaper that the sale of her house fell through when the buyer realized the extent of the ground rent. She says her buyer’s solicitor told them not to touch the property as the ground rent increases meant it would be unsaleable by 2060 when the ground rent would be £9,440 a year. The property’s current value is £200,000 but nobody wants to buy it.

The MP for Ellesmere Port and Neston, a constituency stuffed full of leasehold homes, Justin Madders, told The Guardian: “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.”

Leaseholds are on the up

Although the involvement of Mr Madders, who is calling for a ban on leasehold for estates of houses, means the problem is gaining attention at a national level, statistics indicate that the problem is set to get worse as the number of leasehold homes being developed increases and freeholds become a thing of the past. Fifteen per cent of all houses in the UK are currently leasehold, but in some areas of the North-East, it’s as high as 94 per cent. It’s a countrywide issue, with densely populated cities particularly vulnerable. 64 per cent of properties in Manchester and 53 per cent of London homes are all leasehold.

Spokesman for support group Leasehold Knowledge Partnership said, Sebastian O’Kelly, said: “It’s disgraceful that house builders are building leasehold houses that ordinarily – and until recently – would have freehold title. This is an erosion of the wealth of ordinary people.

“Young people, after years of paying rent, finally buy a home and then find they are still, in fact, tenants – which is what a leaseholder is – with all the vulnerability that that implies.”

While the trend for leaseholds is on the increase in England and Wales, it’s seen as such a negative in the rest of the world that it’s being phased out. Across the rest of the isle, Scotland abolished it in 2004, while in Ireland the leaseholders are able to purchase the freehold at much cheaper rates than in England and Wales in a bid to eradicate them. Let’s hope England and Wales follow suit.

 

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