The flat that will cost you £69trn a year to rent

Treating a long-term lease like a virtual freehold could be a recipe for a nasty surprise, says Sarah Moore.


Always check the small print on leasehold terms
(Image credit: elenaleonova)

Prospective house buyers are being warned about "virtual freehold" agreements that could leave them with astronomical charges and make properties almost unsellable, says Richard Dyson in The Daily Telegraph. Virtual freeholds are leaseholds where the lease term is so long that they are usually considered almost equivalent to owning a freehold. However, buyers are not always fully aware of the potential pitfalls in this type of agreement that make them very different to a true freehold.

If you buy a flat in a block of flats, you will normally do so as leaseholder, and may need to pay a charge called "ground rent" to the freeholder of the property. This freeholder is usually initially the developer of the flats, but developers often sell the freehold on to investors after a few years.

No services are carried out in return for this payment it is a charge distinct from a management charge, which is paid in return for maintenance of the building. Problems can arise when buyers find themselves bound to onerous or even nonsensical leasehold terms. In one example of a block of flats in Islington, north London, ground rents started at £250 per year, but were set to double every 25 years, reaching £69trn per year by the end of the 999-year lease, says Dyson.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

As well as adding significant annual expenses for buyers, such clauses also make it very difficult to find a mortgage lender or to sell the property on. But they are often "buried in the small print" of leases, and so are "regularly missed by solicitors", says Louie Burns, managing director of Leasehold Solutions, which helps leaseholders in this position.

Some leaseholders, when faced with problematic terms, have clubbed together to buy out the freeholder as was the case with the Islington block of flats. However, this can be expensive if the lease involves regularly increasing ground rent, as the price often includes compensation to the freeholder for loss of future ground rent.

The government has pledged to "stamp out" clauses of this type. For now, if a leaseholder feels that they weren't properly briefed about the implications of such clauses by their solicitor, it may be possible to claim against them for professional negligence. Those who entered into a "virtual freehold" agreement after 1 October 2015 are also protected by the Consumer Rights Act of 2015, while those who purchased a property before this date are covered by the Unfair Contract Terms Act of 1977.

Does the ban on letting fees go far enough?

Letting agents will be banned from charging fees to tenants "as soon as possible", announced Philip Hammond in last week's Autumn Statement. This prompted bitter "moaning" from letting agents and landlords' groups, some of whom warned that celebrating tenants would soon be facing "higher rents and less choice of property", says Ross Clark in The Sunday Times.

That's not what the experts think, nor is it what happened in Scotland, where it has been illegal to charge "premiums" to renters since 1984, say Rupert Jones and Donna Ferguson in The Guardian. A report by Shelter in 2013, a year after the law was clarified there, found that landlords were no more likely to have increased rents in Scotland than elsewhere in the UK.

PricedOut, which campaigns for affordable house prices, thinks landlords and agents are likely to bear most of the costs, as they have done in Scotland, while online estate agent easyProperty believes that no "sensible agency" will pass the charges onto landlords, due to competition in the sector.

And if agents try and pass costs onto landlords, landlords will just drop them, says Clark. Theres no shortage of renters, and landlords (as well as tenants) have been paying "through the nose for the services of letting agents" too. In fact, reforms need to go beyond Hammond's recent announcement, says Clark. Tenants still need more help, agrees Claer Barrett in The Financial Times, given that the "dire" shortage of rental properties makes them "powerless to protest". At least buy-to-let landlords, who can threaten to remove their business, have the "leverage" to persuade agents to lower their fees.

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.