• James Powell

Buyer Beware: Understanding Ground Rent

In Parks and Recreation, fictional libertarian Ron Swanson made the assertion that business agreements should never be more complicated than the question:

“I have some apples, would you like to buy them?”

As tempting as such simplicity may be, the purchase of a house – likely the largest and costliest thing most of us will ever buy – probably requires a bit more structure and assurance before going ahead. This is the reason why buying a house requires so many outside parties (such as solicitors) so be involved: to wrap the transaction in enough specialist reassurance that all parties can feel comfortable with making such a large financial commitment.

But what happens when the legal details work against you?

This is the situation many found themselves in thanks to the ‘ground rent scandal’ that’s been unfolding in recent years, and which may finally be resolving thanks to action this week from the Competition and Markets Authority (CMA). The scandal describes purchasers of new leasehold houses who were allegedly misled about the terms of the sale agreement, finding themselves trapped in onerous leases with rapidly spiralling ground rents and unable to purchase the freehold of their property.

To understand this, we must first consider the different ways a person can purchase a home. ‘Freehold’ is what most of us think of when it comes to home ownership: you own the house and the land it sits on, and (subject to regulations) are free to do with it as you wish. When a property is purchased ‘leasehold,’ however, rather than buying the property outright, the purchaser is effectively buying the right to live there for an extended period of time, usually several decades. The ownership of the property remains with the freeholder, which may be the property developer itself or an investment company.

In some situations this makes sense; flats are often sold as leasehold properties as their surrounding buildings require maintenance and repair, so having one ultimate controlling party allows this to be organised efficiently, but this also comes at a cost. On the one hand, leaseholders are expected to pay towards such communal repairs, usually a fixed annual amount, which is reasonable. More nebulously, however, freeholders can charge ‘ground rent’ to the leaseholders. Historically this was a minimal sum of a few pounds which was often not collected at all, but over time many freeholders have increased the ground rent to hundreds of pounds per year (Direct Line put the typical figure at £371).

This has been particularly contentious since opponents have argued that ground rents don’t really pay ‘for’ anything; the cost of the right to live in the property is contained within the sale price, whilst the costs of ongoing maintenance are covered by the aforementioned services charges. Adding to this issue is that leaseholders are not, ultimately, the owners of the property in which they live, meaning they may have limited control and have to follow the rules of the freeholders, such as not being allowed pets, or to make any changes to the decoration of the property.

For these reasons, the idea of buying a house on leasehold has historically been a non-starter. Blocks of flats may require the central organisation that a separate freeholder provides, but why would you buy a house if you have to follow someone else’s rules when living there, pay them for the privilege, and gain no benefit from doing so? You wouldn’t. And for the longest time, very few people did.

This has changed in recent years, with developers increasingly selling newly built houses as leasehold, rather than freehold. The ‘scandal’ part of this comes from the allegations that these houses have primarily been sold to young, first-time buyers who may not have had the experience to know what they were buying. Many of these buyers have claimed that they were not properly informed of the possible risks and costs by their solicitors, who were often recommended to them by the developers themselves.

This, according to the Leasehold Knowledge Partnership, has led to around 100,000 homebuyers living in houses where they must now pay unexpected ground rents and with far fewer rights over their new homes than they expected. Compounding the misery is the discovery that their sale agreements contained obscure clauses allowing the ground rent to double every ten years, eventually leading to astronomical costs and rendering the homes unsellable.

A separate, though no less serious, accusation is from buyers who were made aware of the leasehold nature of their property (often at the last minute) and queried it. These buyers have claimed they were told they would be able to buy the freehold from the developers for a reasonable sum, usually between £3,000 and £4,000. When attempting to do so, however, they found the developers had already sold it to investment groups looking to turn the ground rents into an annual return. When approaching the investors to discuss buying the freeholds back, the buyers found the prices had skyrocketed, in some cases up to £40,000.

Thankfully, it seems the tide is turning on such practices after years of being tied up in legal issues. Aviva’s investment arm, owners of many property leases, have now agreed with the CMA that they will revert these existing leases back to their original ground rent, reversing any increases over the years, and refund the excess money back to the leaseholders.

Developer Persimmon, meanwhile, will allow anyone who purchased a leasehold property from them since 2000 to buy the freehold at a capped price of £2,000, and also refund anyone who previously purchased a freehold from them for more than this.

This is a good start, but it only covers one investor and one developer, though the hope is that other major players in the home ownership field will soon follow suit under threat of further action from the CMA. This is accompanied by legislation currently making its way through parliament on the back of work performed by the Law Commission, with the aim to “set future ground rents to zero” and extend rights for leaseholders. Additionally, in May, an advisory panel was set up to investigate the “commonhold model,” a type of collective ownership model used widely around the world, which would hand control back to flat owners and move the UK away from leaseholding entirely.

Whether this works out, it’s a relief to see more protections being given to homeowners, particularly first-time buyers who may be easier targets for unscrupulous behaviour. However, this scandal has highlighted a number of lessons that can be learned, such as ensuring you hire a trusted professional for your legal matters, and not necessarily the one that the other party recommends.

It’s also important to make sure that you understand the terms of any contract you sign; a trusted solicitor can help explain it to you, but make sure you also understand what you’re agreeing to, and if there are any areas that you’re not sure of, make sure you take the time to understand them. Then, once you’re happy, you can be confident in buying your new home. Or selling your apples.