In the current housing market, it may sound cruel to even mention homeownership. The Building Societies Association (BSA) has warned that first time buyers face the toughest conditions for 70 years[1], the Office of National Statistics has provisionally estimated that average private rents have increased 9.2% in the year up to March 2024[2] and soon you may face a £2,500 fine if you find yourself homeless and living in a tent[3].
But many of those have managed to buy their own homes are still facing huge and unexpected bills, with homeowners who have bought leasehold properties at among those at great risk of life-altering financial shocks.
Unlike freehold properties, in which the homeowner owns both the property and the land it is built on, leasehold property owners do not own the land their property is on and have a lease allowing them to occupy the property for a set amount of time. During that time the leasehold property owner must pay certain fees to whoever owns the freehold – two major fees being ground rent and service charge. [4]
Historically, ground rents (the payment to rent the land the property is built on) have been set at a nominal value and typically remained unchanged for long periods of time. But the last 15 years has seen an increase in cases of homeowners being misled over the terms of their leases and buying properties which escalate rapidly over the length of lease, sometimes even doubling every ten years.[5]
Although many of the companies involved in the ground rent scandal have been investigated by the Competition and Markets Authority (CMA) and made to “halt the practice of doubling ground rents and refund any leaseholders who've already paid out under these terms”, the scandal emphasises how vulnerable leaseholders can be to any changes the terms of their lease.[6]
However, ground rent is not the only bill that leaseholders face. A second and potentially huge expense is the service charge on the property. In theory, this charge should cover the costs of maintaining communal areas of the property e.g. cleaning the stairwells of a block of flats or maintenance of a shared garden, and to put money aside for large infrequent repairs such renovations to the roof of a block of flats. Again, in recent years an alarming number of leaseholders have reported sudden and steep increases in their service charges and many more paying service charges for poor quality repairs that take an unreasonably long time to complete[7]
A further complication with leasehold properties is often the length of the lease. When there is less than 80 years remaining on a lease, the cost of extending the lease rises dramatically because at this point the leaseholder has to pay 50% of the “marriage value” of extending the lease. The marriage value is the increase in the value of the property due to the extension of the lease, and can easily be thousands or tens of thousands of pounds.[8] With long leases e.g. 999 years, the cost of extending the lease is less of an issue but many leasehold properties are offered for sale with shorter leases of either 125 or 99 years.[9]
Naturally, all these additional expenses have a considerable impact on whether a homeowner can afford to stay in a property but also on how much a lender might offer to a prospective buyer, which thus affects the price a property can be resold for.
The problems with leasehold properties have become so severe that new legislation is being debated in Parliament – the Leasehold and Freehold Reform Bill. At the time of writing, the details of the Bill are still being finalised, but they include increasing transparency over service charges, restrictions on the levels of ground rent that can be charged and increasing the length of lease extensions.[10] However… none of these proposals are law as yet and face opposition from many wealthy and powerful organisations (such as the Church of England) who are less than keen to lose a pool of assets worth hundreds of millions of pounds.[11] And, given the criticisms that another key piece of housing legislation (the Renters Reform Bill) has now been “watered down”[12] to such an extent that housing charities have withdrawn their support for the Bill, the power and influence of those who make money from property should not be underestimated.[13]
[1] https://www.bbc.co.uk/news/articles/c87zgx42m5go
[2] https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/privaterentandhousepricesuk/april2024
[3] https://campaigns.crisis.org.uk/page/142013/-/1?locale=en-GB
[4] https://www.moneysavingexpert.com/mortgages/what-is-a-leasehold/
[5] https://www.theguardian.com/business/2020/feb/28/watchdog-to-act-as-uk-homebuyers-misled-and-overcharged
[6] https://www.moneysavingexpert.com/news/2022/08/thousands-to-be-refunded-after-ground-rent--unfairly--doubled---/
[7] https://www.bbc.co.uk/news/business-68396525
[8] https://www.lease-advice.org/lease-glossary/marriage-value/
[9] https://www.lease-advice.org/article/extending-a-flat-lease-the-80-year-trap/
[10] https://nearlylegal.co.uk/2023/11/thin-gruel-delayed-expectations-and-welcome-absences-the-kings-speech/
[11] https://www.lawgazette.co.uk/news/church-of-england-steps-into-leasehold-reform-debate/5119392.article
[12] https://www.bbc.co.uk/news/uk-politics-68686660
[13] https://twitter.com/DanielHewittITV/status/1783016704424960493