I have been trying to sell my flat.
Despite accepting an offer at the beginning of June this year, the sale still hadn’t completed six months later. Not because it wasn’t well presented, desirably located, or priced incorrectly. Indeed, the buyer entered into a bidding war to secure it.
However, my buyer was unable to complete the purchase as major banks and building societies will not lend on the property.
This is due to a tiny clause in my lease on ground rents, the likes of which have become an increasing concern for lenders – and their solicitors.
Lenders have changed their stance on lending on some leasehold flats due to toxic ground rent clauses
When I bought the property 15 years ago, I was unaware of the implications of that clause buried in the long and densely-worded legal document – and apparently so were my solicitors who didn’t mention it at the time of purchase.
While I successfully remortgaged after first purchasing the property, the last time I refinanced was more than five years ago. And since then lenders have changed their stance on lending on leasehold flats like mine.
This is due to the clause in my lease being about what have been dubbed toxic ground rents, stating that the current freeholder can increase the payments substantially every 21 years.
Concerns about ground rents have increased so much so that the Government has been looking into them as part of new legislation.
It follows new homes being built with unfair ground rent clauses where the ground rents doubled every 10 years.
If similar increases are applied at future ground rent reviews, flat owners in my block will be paying more then £20,000 a year in 50 years’ time
My flat recently reached the end of a 21-year ground rent review period. But the ground rent didn’t just double. Instead, it increased from £100 a year to more than £600 a year.
If similar percentage increases were to be applied at subsequent ground rent reviews, flat owners in my block would be paying almost £4,000 a year after the next review, and more then £20,000 a year in around 50 years’ time.
It is no wonder that some lenders are becoming so concerned about such clauses that they are refusing to lend on them.
My freeholder of 15 years has pledged on its website that is is ‘writing to all leaseholders with a clause in their lease where the ground rent doubles more frequently than every 20 years to inform them of the opportunity to enter into a voluntary Deed of Variation to vary this review clause’.
To date, I have never received such a letter or details of how much it would cost.
It is unclear exactly how many flats are affected by such clauses – conservative estimates suggest that the figures are in the tens of thousands, but officials have confirmed behind closed doors that the reality is substantially higher.
It means those with toxic ground rent clauses are left with effectively worthless assets unless they are able to find a cash buyer for their property.
Those with toxic ground rent clauses are left with effectively worthless assets unless they are able to find a cash buyer for their property
What are the options?
It became clear that one way of moving forward was to buy the freehold to our block of flats. This would allow the residents to remove the unfair ground rent clause, via a new lease extension.
A potentially cheaper option is to purchase a deed of variation (see below for the story of someone doing this).
However, buying the freehold has other benefits, including being able to appoint a management agent, rather than being assigned one by an external freeholder.
We first began discussing buying the freehold among the residents around six years ago and had a failed first attempt. But then we picked up the idea again a few years later and ran with it.
My intention was to stay living in the flat, however, the cost of borrowing the money needed to buy the freehold means I can no longer afford to stay.
It was hoped that our freehold purchase would go ahead earlier this summer but the process was dragged out by several unnecessary delays. Freehold purchases should typically only take six to eight months.
There are various steps to buying a freehold and once we were in with a shot, we appointed a ‘project manager’ at the start, along with a solicitor and a surveyor.
The project manager assisted in some of the basic administration, such as setting up a company for buying the freehold with residents each allocated a share in the company. He also set up a bank account and collected a total of £300,000 from the 12 residents to cover the costs of the entire exercise.
He initially insisted the freehold transfer would go ahead earlier this summer, a year since our first residents zoom meeting with him – after which he started collecting cash from the leaseholders.
At this point, I found myself a buyer.
But the project manager didn’t apply for the freehold on our parking spaces at the same time as our flats, something that could have saved months in unnecessary delays.
He also failed to make sure everyone received or signed the required paperwork at crucial points in the process, leading to the process being stretched out even further.
Outdated leasehold system
It is hardly surprising that the outdated leasehold system continues to exist in its current format when there are so many parties benefitting financially from its existence.
No ordinary leaseholder in a large block of flats could reasonably be expected to navigate the process of buying a freehold on their own – and each of the different parties involved charged us a fee.
Even these so-called experts refused to acknowledge the true impact of our toxic ground rent clauses.
Indeed, our project manager insisted early on that I was able to sell my flat at any point and that buying the freehold – which would allow for the removal of the ground rent clause through a lease extension – wasn’t necessary.
What hope is there for Aunt Maud in Leicester to understand the implications of what she is buying when the experts charging leaseholders don’t?
The unfair clause in the lease should have never been allowed. And they need to be banned for both future and existing leaseholders.
Action on ground rents
The good news is that unfair lease clauses are being clamped down on, as they are being investigated by the Competition Markets Authority.
Leasehold Reform Bill
The Leasehold Reform (Ground Rent) Bill will put an end to ground rents for new, qualifying leasehold properties in England and Wales.
However, the new regulation will not resolve the issue for those who already own a home with a toxic ground rent clause. These homeowners will still find it difficult to sell their home without a cash buyer or paying to remove the clause via a deed of variation.
As a result of its investigations, the property developer Countryside has agreed to scrap unfair contracts that saw leaseholders subjected to ground rents doubling every 10 to 15 years.
And Taylor Wimpey has said that it will remove ground rent clauses that double every 10 years.
Other developers and investors must now do the right thing and also remove problematic clauses from their contracts.
If they refuse, the CMA has already indicated that it is prepared to take them to court, which could set an important precedent that these types of clauses are unfair and unlawful.
It would be a huge support to leaseholders with doubling or uncapped clauses in their leases to know that a court has said they are unlawful.
There are also investors and other organisations who bought these freeholds as an investment and were unaware of the toxic ground rent clauses. They would also benefit from a change in the law.
Perhaps one of the reasons that such clauses have been allowed is indeed a lack of regulation of the sector and those who operate within it.
Liam Spender, of Velitor Law, explained: ‘Any other time you are responsible for someone else’s money, there is a very tight system of regulation.
‘They would come down on you like a ton of bricks if you misappropriate a penny piece.
‘With leasehold, they let any old crook set up an agency – even if they have only a couple of small buildings, they could easily have more than £1million in client money – and they just treat it like their own personal piggy bank.’
New leasehold regulations
The Government is aware of this failure within the property market, and yet there is still no date for it be regulated.
Every day that the position remains unclear, another person is added to the list of those affected by this toxic ground rent situation
The legislation needs to put in place the checks and balances to ensure that the leasehold position cannot be abused by those want to profiteer from it – and if they do abuse it, that there is regulation or an ombudsman in place.
Regulation is being worked on. But we need to know how people are able to get out of these toxic ground rent situations without having to pay tens of thousands of pounds just to sell their property.
Every day that the position remains unclear, another person is added to the list of those affected by this toxic ground rent situation.
I have to pay to sell my property
Alistair Dennis has been trying to sell his flat for the past year
Alistair Dennis, 37, has been trying to sell his flat for the past year and feels his life is on hold until it is sold.
He is unable to find a cash buyer and has been told by his estate agent that no lender will offer finance on it anymore.
Alistair got in touch with his developer Shanly Homes about a deed of variation to lower the ground rent. This would reassure lenders and encourage them to lend on the property.
Alistair explained: ‘I got in touch with the developer and was told that it would cost me £8,000 to change the provision in the lease.’
‘My partner and I would like to pool our resources and buy a house together to start our family but this is putting our lives on hold.’
Alistair’s flat is in a block of 70 flats in Maidenhead, Berkshire, on a site where there is double the number.
He said: ‘The agent didn’t initially raise this as an issue but perhaps they didn’t know at that point.
‘Second hand flats are losing their values and only the developers are benefiting. The only way out for us is to pay money so we can sell our flat.’
Alistair bought the flat in 2015 and pays £500 a year in ground rent. That ground rent increases every 20 years by the greater of £500 or RPI.
Since buying the flat, he has also seen his service charges increase from £1,200 a year to £2,800 a year.
He said: ‘I had no expectation that this would happen and that I would not be able to sell my flat. And the only way to sell the flat is to pump more money into it.’
Shanly Homes was approached, but declined to comment.