Introduction to the “Leasehold Scandal”

“Freehold” and “Leasehold”

A transaction for the sale or purchase of a home will require the conveyance of both the property and the land on which that property is situated.

In respect of the land, there are different types of interest which can be transferred to the buyer. “Interest” refers to what that the buyer will obtain, and the type of interest will determine what rights and restrictions will apply to the buyer.

Whilst there are various types of interest, the two which are most commonly dealt with are “Freehold” and “Leasehold”.

Where, upon completion, the buyer obtains the Freehold interest, they will effectively own the property and the land on which it is situated. Conversely, a Leasehold interest is transferred where the owner of the Freehold retains the interest in the land and only the property is transferred to the buyer.

In this instance the buyer becomes a tenant, as the owner of the freehold (“Freeholder”) has become a landlord by granting a temporary right to occupy to the buyer. This relationship is formalised in the form of the lease, a contract which sets out the terms agreed by both parties.

The Ground Rent Scandal

The recent scandal surrounds leasehold property purchases. New or modified clauses were introduced into leases when the homes were built, and it is those clauses that have created onerous obligations that bind the buyers.

The onerous term at the centre of this scandal, relates to the ground rent that is payable to the Freeholder and the rate and frequency at which it can escalate.

Homeowners were not made of the detriment that the presence of these clauses would present, and are now beginning to realise the impact of these clauses.

Victims of this scandal are learning that their properties are becoming increasingly more difficult to sell. This is due to a number of mortgage lenders refusing to lend on properties with these clauses. Homeowners then face the dilemma of either reducing the sale price to attract a buyer, or retaining remaining trapped within the property along with the obligation to pay the ground rent as it escalates.