How to help leaseholders avoid unfair ground rents
Jonathan Frankel is litigation partner at Cavendish Legal Group/ONP
The recent investigation by the Competition & Markets Authority (CMA) into allegations of homeowners being mis-sold leasehold ground rents, has highlighted the need for greater clarity on the issue. The CMA found evidence of potentially unfair terms concerning ground rents in leasehold contracts and potential mis-selling.
However, leasehold enfranchisement is a solution available today that brokers can advise homeowners to look at in order to avoid what many perceive as unfair ground rents in their leases.
Brokers have a key role in helping guide their clients through this issue, as there is a clear lack of awareness among homebuyers of the available solutions.
At CLG/ONP there is a specialist department to handle the process of leasehold enfranchisement.
Homeowners in a leasehold property have a statutory right to purchase the freehold and brokers can advise them to do one of two things. Either they can buy out the freehold entirely – whether it be their leasehold flat or house, in which case they become their own landlord. Or they can extend the lease by an additional 90 years and reduce the ground rent to a peppercorn, which will be zero.
The fundamental issue which is being investigated lies in the leasehold provisions which concern ground rent. Over a period of time it will inflate to potentially thousands of pounds a year, which is going to make it much harder for the owner to sell the property, or even when they need to refinance.
This has been most common in flats with short-term leaseholds of typically 90 years, but it has become more common in new build houses to have shorter terms, which brokers will have seen over the years.
For a homeowner to extend their lease, they have to be the registered owner for at least two years, although they don’t have to be living in the property, so it could be a rental property.
The starting point is to have a valuation done by a professional valuer, as you would any property transaction. This would determine the premium payable. That report will give a value range for what they believe the ground rent to be worth. We, at CLG/ONP work with specialist valuers in this field and can deal with the entire process from beginning to end making the transaction as hassle free as possible.
The next stage is for the homeowner to propose the price they wish to pay based on the valuer’s report to the landlord. They then have two months to respond with a counter offer. If they don’t come back within two months, under the legislation the price will default to your original offer and the extension will still go ahead. But they will likely lose out, so it’s in their interest to come back with a counter offer.
Once their offer has been made it’s really then a negotiation between the two valuers and legal representatives for the landlord and leaseholder. If the parties really cannot agree the terms, then the Property Tribunal is able to make a binding decision.
The whole purpose of the process is for a sum of compensation to be paid to the landlord for releasing the ground rents before their leasehold term. The longer you leave it, the shorter your lease gets and as such the more expensive it will be.
Therefore the best advice brokers can give leaseholders right now is to speak to the experts in this area to see how they can help maximise the value of their leasehold property.
The other factor brokers should consider is where the client’s lease has less than 80 years left on it, an extra layer of compensation called marriage value will kick in and make it more expensive for the leaseholder paying the premium.
Even though there is the premium to pay, it makes sense to buyout the ground rent from a commercial point of view because it may hamper the sale of the property further down the line.
But buyers, and brokers need to ensure they speak to conveyancers who are experts in this area, and at CLG/ONP we have a team dedicated to leasehold enfranchisement which deals specifically with this issue. We stand ready and willing to assist.