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

Woman looking at her laptop shocked © iStock
Always check the small print on leasehold terms

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.

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. There‘s 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.

  • Geoffrey Leach

    I completely agree that it is wrong for a lease to include a clause requiring that the ground rent will increase at some fixed rate regardless of inflation.

    But to have the £250 ground rent double every 25 years is an increase of just under 3% per year and, based on recent decades, would have resulted in the ground rent reducing in real terms because inflation exceeded this.

    I see from the Bank of England’s inflation calculator that priices have increased by a factor of 2 in the last 25 years (which matches my own recollection). But over the last 50 and 100 years they have increased by 17 times and 92 times respectively (so having a ground rent that increased by 4 times in 50 years, or 16 times in 100 years, would have been an absolute bargain compared to other costs).

    I suppose it is good that the Telegraph journalist is familiar with compound interest (so able to produce the headline figure of £69 trillion by compounding over 999 years) but poor that absolutely no mention is made of inflation.

    Once again, I agree that imposing a fixed rate of increase is completely wrong. However, arguing that this particular rate is an absolute scandal that is guaranteed to reduce someone to penury shows a profound ignorance both of the long term nature of inflation, and the actual rates of historic inflation that have been experienced in the UK.

  • Juanfranco Manganelli

    If it was easier to evict not paying tenants. More Landlords would manage their own properties and the agents that manage would have to charge less. My message is make evictions easier.