Winners and losers from leasehold ban

After two years of news stories about the plight of new-build homeowners, the government has finally announced a ban on new-build houses being sold as leasehold, and other measures designed to cut out unfair and abusive practices within the leasehold system.

This problem has been around for a while, but has only recently made it to the forefront of the national consciousness. Although traditionally leasehold ground rents were “peppercorn” ones (essentially negligible), in recent years housebuilders have quietly created a new revenue stream by including escalating ground-rent terms in the leases of new-build houses.

Onerous ground-rent arrangements include those that see initially affordable sums double, or rise in line with inflation, every ten years. Some leaseholders will be paying annual ground rent of more than £9,000 in 50 years’ time. On top of this, freeholders also have the power to charge homeowners’ unregulated “consent fees” to extend or alter their house.

Following a government consultation last year, communities secretary Sajid Javid said it was “unacceptable for homebuyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms”. The new rules mean ground rents on new leases – for both houses and flats – will be set to zero.

The government will also write to developers to ask them to provide “necessary redress” to leaseholders with the most onerous terms, and work with the Law Commission to try and make it easier for leaseholders to buy their freehold.

A two-tier market

The leasehold ban was generally welcomed, but questions remain about the position of existing leaseholders. The ban on most new-build houses being sold as leasehold will effectively create a two-tier property market, with new-build freehold houses much more attractive to homebuyers than neighbouring older leasehold properties.

The announcement also lacks clarity about what will happen if a developer has already entered into an off-plan plot sale or freehold pre-sale. Will the ground-rent cap override these contractual arrangements? Shares in most housebuilders dropped slightly on the news, while retirement-home specialist McCarthy & Stone saw its share price drop by 10% (retirement developments tend to rely heavily on selling via leasehold agreements).

Those who have invested in funds that specialise in buying freeholds will also have questions about the future of the sector. In recent years, a wider range of investors have been drawn to the steady cash flow offered by ground rents and the lump sums on offer from lease extensions and freehold reversions.

The Long Harbour Ground Rent Fund, headed by William Astor, the half-brother-in-law of David Cameron, has bought the freeholds to more than 160,000 residential units, worth about £1.4bn. Others include the Ground Rents Income Fund, a real-estate investment trust that listed on the London Stock Exchange in 2012, which holds properties valued at £139m.

The future for these funds is unclear. The ban on leasehold properties is not retrospective, leaving thousands of leaseholders locked into existing contracts. But many leaseholders claim they were mis-sold or badly advised, so legal action against developers and law firms is inevitable. And once new ground rents are set to zero, the opportunities for funds to buy further freeholds is expected to shrink considerably.