This spring Nationwide Building Society announced its decision to stop lending against any leasehold new-build flats and houses where the ground rent is more than 0.1% of the value of the property – in a move aimed at challenging unfair ground rent increases.
Amanda Holden, Senior Associate Solicitor at The Wilkes Partnership Solihull, explains the impact this is likely to have on purchasers as well as property developers.
Amanda said: “It remains to be seen, but this could well lead to other lenders following suit. This is likely to have a positive impact for the buyers – as it is expected to force developers to reduce ground rents making these properties more affordable in the longer term.
“Ground rent is different to the service charge payment due under a lease. Service charge payments cover the costs of insuring the building, maintaining the common parts of the building and things of this nature.
For houses – as opposed to flats- that are sold on a leasehold basis there are usually no communal areas and therefore no service charge payments due, but there will still be ground rent payments. Property owners receive nothing in return for ground rent which is seen by some as an outdated form of tax. Ground rents have been known to increase by as much as double every 10 years in some cases.
“Where developers are concerned, it is – now more than ever – vital that they seek legal advice as early on in their project planning and setting of ground rent levels as possible to ensure that they will be able to achieve the return on investment that they are aiming for. Otherwise they may encounter difficulties or delay in planned disposals if the mortgage market is restricted as a consequence of the ground rent mechanism.
“We may now see an emergence of commonhold sales for certain types of multi-tenanted property including blocks of flats. The legal structure is in place for these but they are almost completely unheard of in the current market.
The difference between commonhold and leasehold is that a service charge still applies but the unit owners through membership of a Commonhold Association owns the land and so there is no ground rent payable.
We should see a revision of how ground rents are set and indeed may see them disappear altogether for unit sales that should otherwise be freehold transactions.”
If you have any queries regarding leasehold, commonhold or freehold property sales from a buyer perspective or as a property developer, please contact Amanda Holden at The Wilkes Partnership on 0121 733 8000 or email [email protected]