The leasehold and ground rents scandal in Carlisle

Freehold or Leasehold .. which is best? Well, when buying a property in the UK there are two main types of ownership – freehold and leasehold and, when boiled down, they mean the following…

Freehold: The person who owns the freehold of a property owns the property and the land it stands on.

Leasehold: As a leaseholder you do not own the land the property is built on. A leaseholder essentially rents the property from the freeholder for a number of years, decades or in some Victorian terraced houses, for centuries. 

All apartments have to be sold as leasehold properties because of the very nature that you have a neighbour above or below you (so both of you can’t own the land) with the length of the lease being over 100 years (even more sometimes).

However, with some apartments – particularly Victorian and Edwardian houses converted into numerous apartments – which are sold on the basis that the leasehold apartment owner also owns part of the freehold (with other leaseholders in the same building), having what is known as ‘share of freehold’.  Similarly, the Government also brought in legislation a number of years ago for more modern apartment blocks built in the 20th century where it allowed leaseholders to club together and have the right to purchase the freehold together.

Now I must stress, there is nothing wrong with leasehold – it’s been a useful type of homeownership since Norman times, it’s just that with a leasehold comes a potential extra responsibility. If there are four apartments in a block, who pays for the leaking roof when all benefit from a watertight roof? Who pays for the bad foundations, when all benefit from good foundations? Who pays for building insurances? .. the list goes on – so clauses are added to the leasehold agreement to ensure everyone is protected and pays their fair share of the joint costs of the building with service charges and a nominal ground rent (ground rent is a nominal rent, commonly quite low, often in the region of £50 per year to the freeholder of the property).

Whilst houses tend to be sold as freehold as it’s a more unambiguous set-up, given there is only one property on the land. Contentiously however, in the last 20 to 25 years this has not always been the case with new-builds as some new homes’ builders have sold the leasehold to the buyer and retained the freehold. There is nothing wrong with that, it’s just in some cases (not all) they also added some oppressive clauses to the lease of the property they were selling, which could be the next PPI scandal – albeit for property.

Government reports have emerged recently that suggest 12,000 leaseholders in the UK are facing ground rents – which they pay to the freeholder – that double in cost, usually every 10 years, but occasionally more frequently.

Builders started to add clauses into leasehold property sales with ground rent being set at £300 and £400 a year, yet it doubled every ten years. Though unwary first-time buyers were habitually told that their 500 and 999-year leases were practically freehold, the clauses inescapably meant that the ground rent would spiral to ridiculous levels meaning the average ground rent would be £23,750 a year by 2070 and £379,900 a year by 2130, making the properties practically unsellable today, with owners often left unable to re-mortgage too.

So, how many people are affected by this in our local area?

Well, using Government data, our research suggests that in Carlisle 552 householders have bought a detached house, semi-detached house or town house (which would normally be freehold) as leasehold. Not all these have onerous lease clauses, yet some do. I know it doesn’t sound a lot, yet that is potentially 552 lives ruined with houses they can’t sell – making them prisoners in their own property.

The good news is the Government is on the case and serious about sorting this issue out as they have proposed a ban on the future sale of houses as leasehold, as well as cutting ground rents to zero. Yet stern questions remain about the future of homeowners in existing leaseholds. Westminster wants the builders to set up compensation plans, and we will say many (not all) have stepped up to the mark and started to sort this, although some campaigners have said the schemes are not fit for purpose, let’s hope they are wrong.

Are Carlisle Builder’s Constructing the Wrong Type of Property?

The British housing market has never been so newsworthy. Every other day, there is an article in the newspaper or online about impending house price drops, house price rises, building on green belt, mortgage rates up/down, first time buyer affordability and the woes of being a buy to let landlord, to mention but a few. As a nation, we have a strong national desire to be homeowners.

The English Housing Survey stated the proportion of owner occupied households increased steadily from 52% in the early 1980s to 2003 when it reached its peak of 71%. Since then, owner occupation gradually declined to 63% in 2014, yet in fact increased to 64% in 2017 and has stayed there since.

One of the main motives of home ownership is the prospective tax-free capital appreciation that can be obtained. It’s no wonder the phrase ‘as safe as houses’ is popular in the English language, as many homeowners use homeownership as a nest egg or even a pension pot, as savings rates are at extraordinarily low levels.

Yet even with the news that homeownership is on the rise, the biggest seismic shift to the Carlisle property market is the growth of the rental market, which has more than doubled in the last 15/20 years. So how can the social housing sector (Council Housing) remain roughly at the same level since the millennium, homeownership slightly grow, yet the private rental sector be so huge? Well it comes down to the fact that many more homes have been built in Carlisle in the last 15/20 years, and a lot of them have been bought for buy to let, or Carlisle homeowners with second hand starter homes have also sold them to buy to let landlords and they have bought larger brand new homes.

Yet the question we wanted to ask is … are we building the right sort of homes, especially when it comes to the number of bedrooms? Whilst the data doesn’t exist for Carlisle, the country’s stats are available and it makes fascinating reading…

Looking at the graph in 2008, 59% of new homes built were one and two beds, yet last year that had dropped to 35%.

The Housing Minster said recently he was concerned that new homebuilders were building the wrong types of homes in the wrong places at the wrong prices. Many (not all) tenants are tenants because they can’t afford the deposit and as there is a direct coloration between the rent’s landlords charge and tenant’s earnings (i.e. as earnings go up, rents go up and vice versa), and earnings for the last seven years have been subdued, the property tenants have been able to afford in Carlisle are the smaller one and two bed properties. Yet a lot of these tenants are now having families (with the need for larger property with three, even four bedrooms).

Looking at the stats for Carlisle, it can be seen the vast majority of homeowners live in the larger properties with more bedrooms, whilst private rental tenants are in the smaller properties (with less bedrooms).

My concern is – will young families and professionals be able to afford to live and work in Carlisle, especially as the local authorities are unable to build council housing (aka Social Housing)?

One symptom of all these issues mentioned above is the massive growth in multi-family households (i.e. households containing two or more families), which have increased by 42% in under a decade. Now of course many will be because of older couples moving in with their adult children yet many are unrelated families sharing a house, something that simply shouldn’t be happening in 2019.

If we don’t increase the supply of the ‘right’ sort of homes, what will their living conditions be like?

Whilst we are still a country of homeowners and even though there has been a slight growth in numbers, the long term trend is downwards if we don’t build enough of the ‘right’ new homes, in the ‘right’ location and the ‘right’ price, Carlisle people will continue to increasingly rent … which is only good news for Carlisle buy to let landlords.