In certain circumstances in England and Wales, you can effectively buy a property without owning it. This is despite the average house costing £295,888 in England and £205,114 in Wales. These properties are known as leasehold properties. The system of leasehold property dates back to the middle ages. In such times, land was not given away so freely as land ownership gave families a tremendous amount of power. However, to maximise earnings whilst keeping their land, landowners began leasing out their grounds. They allowed the peasantry to live on and work their land. In exchange, the tenants would provide landowners with food and services.
Leasehold property law still exists today, allowing land owners to keep ownership of land whilst leasing buildings to tenants. This is different from regular rent as there is a long lease. This means that the tenant owns the property for a set period of time, often as long as their entire life. However, ownership does not pass on to family heirs; when the long lease is over, it becomes property of the land owner or their family once again. Most flats in England and Wales are leasehold.
Even though you pay a substantial amount of money to purchase a leasehold, in some cases, you still need to pay ground rent. In modern times this became more of a goodwill gesture. The figure would be a small token of around £100. However, property developers in the 2010s began to charge as much as £1,000 per year even though the leaseholder had already paid to lease the property. However, thanks to new leasehold reform, ground rent charges have been eliminated.
This article will discuss ground rent and recent changes to the law.
Do people still need to pay ground rent?
As of June 30 2020, ground rent has been abolished for new buyers. A government on ground rent for leasehold properties was brought in by the government. This is said to be part of an effort to counter rising living costs. Zero ground rent means people living in a leasehold property will save hundreds of pounds a year. Also, leaseholders were not happy because most of them had taken out a mortgage for the property only to then be renting as well.
The ground rent ban was also brought in to curb exploitative ground rents. In 2017 ground rents became a national scandal. The ground rent scandal, also known as the Fleecehold, exposed property developers for putting hidden charges into leasehold contracts. This meant buyers had to pay ground rent at increasing costs. These hidden charges meant ground rent would double every ten years. In an example published by Which, an annual ground rent of £295 in 2008 was set to reach almost £9,500 in 2058.
The government also stated that ground rents served no clear service to customers despite increasing costs. They also made the move to promote fairer, more transparent ownership. As stated by Leasehold Minister, Lord Stephen Greenhalgh:
“This is an important milestone in our work to fix the leasehold system and to level up home ownership.
“Abolishing these unreasonable costs will make the dream of home ownership a more affordable reality for the next generation of home buyers.”
Do I still need to pay ground rent if I have already agreed to make ground rent payments?
Unfortunately, if you are already contractually obliged to pay ground rent, you will have to continue making payments. However, a number of changes in ground rents have emerged as a result of the scandal. For example, there has been a government crackdown on the doubling of ground rents. The Competition Market Authority reached an agreement with major property developers to stop the doubling of ground rent.
A number of building companies have agreed to return ground rent to the initial rate. These companies include:
- Countryside Properties
- Taylor Wimpey
The CMA is continuing investigations into several companies. These include:
- Barratt Developments
- Brigante Properties
- Abacus Land
- Adriatic Land
The aim is to return ground rent to its original meaning – a token payment. This token symbol is often referred to as peppercorn ground rent.
Are there any new rules for leaseholders?
Leaseholders have been given even more benefits outside of reduced fees. Now, instead of leases lasting for only around 90 years, leaseholders have the automatic right to extend their leases by 990 years. This was part of the largest reforms to property law in England in 40 years.
Also, flats and apartments are normally recognised as leasehold property because they are built on shared land. To counteract this, the government is setting up commonhold councils, meaning the block is commonhold and the individual housing units are freehold. So, as the block of flats is jointly owned by everyone in the block, it is no longer leasehold. So, if anyone buys an individual flat, they truly own it as a freehold property.
As stated by Professor Nick Hopkins, Commissioner for Property Law at the Law Commission said:
“We are pleased to see government taking its first decisive step towards the implementation of the Law Commission’s recommendations to make enfranchisement cheaper and simpler.
“The creation of the Commonhold Council should help to reinvigorate commonhold, ensuring homeowners will be able to call their homes their own.”
Does leasehold exist in Scotland?
Scotland used to use a leasehold system known as Feuhold. This was in place for around 800 years. However, reforms by the Scottish government began to abolish long leases, promoting private ownership instead. For example, the Tenements (Scotland) Act 2004 enshrined a residential lead ownership system for flat blocks.
In 2012 the Scottish government brought in further reforms meaning all leaseholds would automatically transform into outright ownership. Anyone under a leasehold lease agreement would automatically become outright owners of the house or flat they were living in.
This means when you buy a property in Scotland, you actually own it. You also own the land outright or a share of the land if it is within a flat block. Therefore you do not need to make a ground rent payment as you own the land.
What are service charges?
If you own a long-hold lease, you may need to pay out extra money beyond ground rent charges. This includes service charges. However, unlike ground rent, you are actually paying towards something.
For example, if you live in a communal block of flats, you may have to pay a service charge. Service charges can include:
- Communal cleaning – such as hallways and lifts
- CCTV and Control room monitoring of cameras
- Door entry system – such as security doors.
- Communal utilities: Electric water and gas in communal areas
- Management and admin charge for running these services
- Building safety and testing, such as maintenance, equipment testing, and health and safety testing. For example;
- General health and safety
- Fire safety/alarms
- Emergency lighting
- Lift maintenance
- Sprinkler systems
Service charges also include management of the grounds, including:
- Grounds maintenance and tree management
What are sinkage funds?
If you rent a leasehold property, you may be subject to even more additional costs. As well as a service charge and ground rent, you may have to make payments known as sinking funds to landlords. This is essentially a reserve pot used to cover the cost of major repairs to a building.
This is normally the case in large flat blocks where ownership is split between several tenants and landlords. Usually, both you and the other leaseholders will pay into the pot. Many prospective buyers in a flat block will have to sign a contract agreeing to make regular payments towards a sinkage fund or reserve fund. The reserve fund typically earns interest as it sits in a pot until necessary work to the building is needed.
If major work is needed on the entire building, such as a new roof – the sinking fund will hopefully cover the cost. In most cases, if you sell your property, you cannot get your contribution towards the sinking fund back. This is held in the pot for the next tenant in case any major work is needed on the property.
What is ground rent: Summary
South of the Scottish border, it is normal for prospective homeowners to buy a house they do not own. This is a process known as leasehold buying. This is a practice dating back to the middle ages used to ensure the wealthy and powerful held onto land whilst renting ground to the peasantry. This outdated practice is still used, allowing landowners to rent out property over a long-term period at a buying price whilst still keeping ownership of the land. This was particularly the case in flat blocks. This was because the homes were built on the same land meaning there could be no individual ownership of the land.
However, the UK government introduced new laws meaning flat blocks are communally owned or commonhold. This means ownership of land is shared amongst tenants. This is a practice that already exists in Scotland. Also, in Scotland, freehold is the norm.
The government has also introduced laws to tackle unfair leasehold practices. For example, leaseholders used to pay a token payment for ground rent. This was paid annually to landlords. However, there was a ground rent scandal that saw unscrupulous building developers charging increasing ground rent rates, which doubled every ten years. In response, the government introduced a law banning landlords from charging ground rent on new leases. They also began cracking down on landlords charging excessive rates.
Leaseholders also were given the right to extend their lease by 990 years. As well as ground rent leaseholders – especially in flat blocks have to pay further charges. For example, a charge for services to communal areas like cleaning and security. Also, a sinkage fund is in place in many contracts. This means everyone contributes to a pot in case any work is needed in the shared building. An example of this is a new roof.