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9 March 2018updated 09 Sep 2021 5:03pm

The leasehold system is an industrial-scale rip-off

The MP who has launched the Leasehold Reform Bill explains why the UK’s antiquated system is putting homeowners at risk. 

By Justin Madders

It has been described as “the PPI of the housebuilding industry” and has emerged as one of the biggest industrial-scale rip-offs of recent years. Countless homeowners have discovered, due to a combination of greedy developers, sloppy lawyers and government inertia, that they are not in fact, homeowners at all. They are leaseholders and under the terms of the lease, they are charged an annual ground rent, which in some cases, doubles every five or ten years, which can render the property unsellable. 

The ground rent, it should be pointed out, is separate from and often in addition to a service or maintenance charge, as the person living in the house gets absolutely nothing in return for their annual payments. These charges have been completely exposed as being nothing more than a cash cow for the freeholders.

The government’s recent consultation on ending unfair leasehold practices has recognised the seriousness of the problem by proposing an outright ban on the sale on new homes on a leasehold basis. That is welcome and can’t come soon enough, but it leaves open the situation of the thousands of people currently trapped in their homes because the toxic leases they have signed are unsellable. 

Many, but not all, of the buyers knew that the property was being sold to them on a leasehold basis. However, very few were fully aware of the finer detail of what they were signing up to. Almost all were left with the impression that they would have first refusal on the freehold of the property and that it would be possible to purchase the freehold for a reasonable price. However, the figures that were quoted for the purchase of the freehold by the salespeople working for the developers bear little relation to the costs that people were quoted later on, because shortly after they moved in, the freehold of their property was sold, without their knowledge or consent, to a third party that they had never heard of. In many cases, the freehold to their house was moved offshore, so that what they had thought was their home became the property of a string of shady companies operating from a tax haven.

When those living in their leasehold home enquire whether the new freehold owner is willing to sell them the freehold of their home, they are often told no. Sometimes, they receive no response at all. Such responses are not consistent either: neighbours in almost identical houses in my constituency have been quoted wildly different prices to purchase their freeholds.

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When the leaseholder eventually receives a quote for purchasing the freehold, they are often quoted an astronomical sum and are told that it is non-negotiable. These quotes are always many times higher than any figure the developer’s sales staff had told them. The same has been true when residents of a block of flats have collectively sought to purchase their freehold and take responsibility for the shared areas themselves. If the leaseholder does wish to proceed with purchasing the freehold they then enter the convoluted and expensive process called enfranchisement. 

The provisions of the lease often require the person wishing to buy the freehold to pay the freeholder’s costs in dealing with the application. Currently, too many leaseholders are prevented from exercising their rights because they cannot afford to do so. One recent example was of a retired couple paying £38,000 to buy their freehold. Such people are being ripped off when they first buy the house, and then ripped off again when they try to buy the freehold.

The Law Commission have been tasked with coming up with a solution to enable people to buy their freeholds more easily but it may be some time before they respond. That is why I introduced my own Private Members Bill, which contained proposals to assist the thousands of people around the country who feel trapped in their own homes.

The Bill’s first aim is to introduce a simple and fair scheme, with a clear and transparent statutory pricing model, where the amount for a leaseholder to purchase their freehold would be capped at no more than ten times the annual ground rent. Such a system would involve a simple formula for calculating the value of the freehold and this would be set out in statute so that everybody knows at the outset what they are dealing with. 

The Bill’s second provision seeks to rebalance the awarding of costs at leasehold property tribunals. The system as it stands reinforces the existing imbalance of power between the leaseholder and freeholder, and the Bill ensures that a leaseholder will not have to pay the freeholder’s costs just to enforce their own rights under the lease. Whether its through my Bill or government legislation the need for a new system along these lines to be introduced must be a political priority.

When people bought their houses, they thought they were doing just that – buying their home. They never contemplated for a moment that the true owner of their home was actually someone they might never know the identity of, who could then sell on their interest in the property to somebody else without their knowledge or consent. 

We need to give people the chance to escape that trap fairly. Greedy speculators have taken the feudal law of leasehold and applied rocket boosters to it to line their own pockets. Change cannot come soon enough.

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