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Changes to leasehold: What’s in store for developers?

01 Aug 2017

According to recent news, the Government is starting to clamp down on properties that are sold as leasehold rather than freehold, which is currently leaving home owners to pay on-going ground rents even though they have paid full market value for their property. The decision has come in the wake of increasing numbers of developers opting for leasehold schemes in preference to freeholds, given the opportunity for  future investment income. A new Government consultation outlined plans to prohibit the sale of any new-build properties as leasehold. In the event of such properties being built, there will only be the ability to charge a “peppercorn” rent, which is a nominal amount of usually £1 per year which often isn’t even collected. At the moment leases usually provide for a ground rent of upwards of £250 to £500 per year, with escalating provisions to double the amount every 25 years or to increase in line with RPI. The idea behind the ban is to level the playing field between freehold and leasehold, cracking down on unfair annual ground rents. Under a lease, the homeowner pays a fee to the freeholder – which can be a person or company that owns the land that the property is sitting on. These fees do not apply to freehold property.

Labour has said that leasehold rates are “feudal” and “outdated”, and that they should instead be replaced by a much fairer peppercorn rent. The clue here is in the title, as such a rate refers back to historical eras where tenants would pay rates in literal peppercorns towards the land they rented, resided or farmed.

It is possible for existing leaseholders to buy the freehold of their leasehold house provided certain conditions are met, and the ground rent provisions will determine the premium (or price) that they will have to pay to acquire the freehold title. So, all is not lost for those who have already purchased a leasehold and want to be rid of their leasehold obligations.

Whilst this consultation might be good news for homeowners of leaseholds, it will hit housebuilders and developers. The Government needs to be sure that it is balancing the needs of the market with business at the other end. We need new homes to be built, that much is clear; the last thing the Government should do is make current schemes untenable. There may well be schemes currently in the planning stage that build in the future revenue stream from ground rents into the financial model. The Government may need to consider transitional arrangements, and are unlikely to make any changes retrospective to current leases.

It remains to be seen how and whether any change will come to fruition but if you own a leasehold property or are a developer and would like to discuss these issues with us then please contact the Real Estate team at DMH Stallard who will be happy to help.

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