Today, we are expecting a mention in the King's Speech about stopping something called Leasehold titles for houses. On the surface it sounds like a good thing and many people are happy about this, but I can't help hearing warning bells going off in my head about this proposal and here is why.
Let's take a closer look at why developers use Leaseholds and what is most likely to get used in their place when banned.
A Leasehold title is like a long-term rental agreement for a home. The person with the lease gets to live in the related property for a long time. In return, they pay two kinds of fees to the Freeholder which are defined in the Leasehold Agreement. One fee is called a Ground Rent. Before 2022, this could be a bit of money, but now, it's only a very small amount, like a single peppercorn. The other fee which gets paid is called a Service Charge. This covers things like cleaning, repairs, and upkeep of shared areas and insurance, if your Leasehold home is a flat within a block.
Now, for houses in private estates, it can get a bit tricky. Some of the roads, play areas, landscaping and even flood prevention defences might not be looked after by the local council. Instead, they're maintained by the owner of the estate or a special company (called a management company) set up by the builder which will come at a cost. This is why houses in private estates are commonly sold as Leasehold, so that a Service Charge is collected to cover maintenance and the running costs of a private housing estate.
Over the years laws have been put in place to provide Leaseholders with extra rights and protections to reduce the chance of been taken advantage of. In particular there is a dispute mechanism which Leaseholders can use to make sure the costs charged to them are fair.
But what if Leaseholds for houses was to be banned, as we expect to hear in the King's Speech? If all new houses have to be sold as Freehold, developers still need a way to collect money for maintaining the housing estate. So, they most likely to use something called an Estate Rentcharge instead. This is already happening more often as new homeowners already dislike the idea Leasehold.
So lets look at an Estate Rentcharge in greater detail. Its similar to a Service Charge for covering the costs of looking after shared areas. Most Rentcharge bills don't state a fixed amount, so you won't always know beforehand what you need to pay. But, unlike a Service Charge in a Leasehold (where you can raise a dispute about costs), there's no system in place to challenge the fee charge, if it seems too much. You have no choice, you have to pay up.
What's even more worrying is what happens if you're late with a payment. They can take your property back or make it really hard for you to sell or get a new mortgage. Even if you pay off what you owe, the problem doesn't go away. These clauses stick around forever and pass on to the next owner.
The law relating to Estate Rentcharge Clauses is really old, dating back to 1925, and is no longer fit for purpose in our modern world.
Thankfully, some mortgage lenders are on your side and are getting smarter about these tricky Estate Rentcharge Clauses. Some won't give a mortgage for a property with them at all, and others might consider it only in special cases. This is good protection for them and also for you, as a first time buyer, to make sure that your home isn't placed at risk. If a mortgage lender won't accept the terms of the Estate Rentcharge clause, then no matter how much you have fallen in love with the home, you may be better off looking for a different home or request that the terms be changed before you can move forward with your purchase.
In my opinion, stopping Leaseholds for new houses could be a good thing, but we also need to change the law around Estate Rentcharge clauses at the same time too. They are very likely to be used as an alternative to covering maintenance costs. And as they are currently, they could be even worse for homeowners. We need better rules to protect people who have to pay these charges.
Empowering you with knowledge, one unintended consequence at a time.