Leasehold scandal: Five major developers abolish ground rents on new flats

Five of the UK’s biggest housebuilders have scrapped ground rents on new flats, in a victory for future homeowners and campaigners who have long argued that the charges allow leaseholders to be exploited.

Thousands of homeowners have been hit with inflated management fees and ground rents that rose by hundreds or even thousands of pounds a year on new-build flats and houses. Many of those sales were subsidised with public money under the help to buy scheme which has helped to boost developers’ profits.

The practice of developers selling off the freehold of a new property to a third party is now effectively over, a move that campaigners hailed as the end of the “leasehold racket”.

Changes affect new sales only and will not directly impact the roughly five million flats that are already under contract to pay ground rents but will add to pressure on the government to overhaul the leasehold system.

Two of the four developers that are currently being investigated by competition regulators for allegedly mis-selling leasehold properties – Countryside and Barratt Developments – are granting all new buyers zero ground rents and long leases.  The third, Taylor Wimpey, is offering zero ground rents and will review the length of its leases. The fourth developer, Persimmon, has not made its position clear. 

Bellway, which is not under investigation, has introduced 999-year leases with zero ground rent. A management company run by residents will be in charge of the building, giving them control over maintenance and the level of charges they face. Barratt is offering a similar arrangement and senior industry sources predict that other developers will soon follow.

Buyers at a Berkeley development in Greenwich had been told they would be charged ground rent of £450 a year but have since been told this will be reduced to zero. The company is understood to be taking a “development by development” approach to lease terms.

Housebuilders are responding to changes in the help to buy scheme which reopens to new applicants next week.

The subsidy scheme has provided tens of billions of pounds of public money to finance sales of homes, significant numbers of which left owners with charges for maintenance or ground rents that rose to unaffordable levels. Other properties were later found to be substandard or to present a fire risk, leaving owners with large bills while freeholders and developers avoided liability.

After sustained pressure over the leasehold and cladding scandals, the government said in February that from April 2021, leasehold homes cannot be sold under help to buy unless ground rent on them is peppercorn – legal jargon for “no financial value” or zero. Developers are applying the same lease terms to properties sold outside of help to buy.

“Developers have not taken this decision because it’s the ‘right thing to do’,” said Katie Kendrick, founder of the National Leasehold Campaign. “They are being forced to change their poor practices because the applications for the new help to buy scheme opens from the 16 December and Homes England have stipulated that ground rent charged must not exceed a peppercorn.”

“Developers have used help to buy as a pull factor to sell leasehold houses for no other reason than to create a second asset for them to sell and boost their profits. It’s a national scandal.”

Ms Kendrick added: “By agreeing to do away with monetary ground rents on their new flats, developers are giving up a lucrative income stream but it is also quietly dropping the practice of the onward sale of the freehold to a third-party investor. This will end the unethical trade in the freeholds of people’s homes.”

The NLC is calling on the government to help “a generation of leaseholders trapped in homes they cannot sell”.

Sebastian O’Kelly, of the Leasehold Knowledge Partnership, said all developers must now publicly commit to 999-year leases, zero ground rents and giving residents power over their homes by giving freeholds to residents’ management companies.

This would guard against excessive fees charged by freeholders that have caused financial problems for many leaseholders.

Service charges are only meant to cover the cost of services provided but many leaseholders have been charged more. Some freeholders have also made money from kickbacks on buildings insurance, a cost that is borne by leaseholders through higher premiums.

“With ground rents gone there is no legitimate income stream from owning the freehold of a building,” said Mr O’Kelly.

“Developers can’t now sell them off to sharks who jack up the costs. The reputational damage would be too great. The leasehold racket hasn’t got a future.”

Around five million flats in the UK are leasehold and most residents must pay ground rents. Mr O’Kelly said the change in approach sends a message that ground rents are charged for “no service whatsoever” and should lead to a significant reduction in the amounts leaseholders must pay to extend their lease or buy the freehold of their building.  

These costs frequently amount to tens of thousands of pounds, figures which Mr O’Kelly said are now harder to justify.

“A major flaw has been exposed in the system. We now need ground rents to be banned altogether," he added.

A spokesperson for Taylor Wimpey said: “We intend to participate in the new help to buy scheme which launches next April, and we can confirm that all new sites with leasehold plots that have commenced being sold on or after 1 December 2020 will have a peppercorn ground rent, not just those being sold under the new help to buy scheme.”