News: Article

'Virtual Freeholds’ a Trap for Lessees

Following new claims made by a number of leasehold specialist companies, lessees of thousands of newly-built leasehold flats, marketed as ‘virtual freehold’ properties with 999-year leases, are in danger of losing their capital investments.


When flat owners purchase a leasehold flat, they are - in essence - purchasing the right to use the land on which that property was built. The freeholder retains ownership of the land and, in turn, owns the fabric of the building itself. As part of their responsibility as leaseholder, property owners are required to pay ground rent to the freeholder in accordance with a clause written into the lease of the property they have purchased.

 

Through 'virtual freeholds', freeholders exploit these onerous ground rent obligations to make their as lucrative as possible.

 

The term 'virtual freeholds' implies that, due to the 999-year lease, the owners' investment will be protected indefinitely because there is no need to extend the lease. In comparison to the lease of a regular leasehold property which often only lasts between 99-125 years, prospective property owners are frequently mis-sold the concept that 'virtual freehold' properties are a cheaper alternative to their supposedly outdated counterparts.


Typically, before even a single brick has been laid, property developers sell the freeholds of their buildings to professional ground rent investors. During negotiations, freeholders often request that certain clauses - typically regarding ground rent - are integrated into the terms of the lease to benefit them before they invest their capital; seizing any opportunity to exploit unsuspecting future purchasers and raise more capital for future investments.

 

For one property on a development in Chatham, Kent - the potential purchaser of which was a client of Regency Leasehold - a clause was written into the lease which would have seen an initial ground rent amount of £250 per annum (p/a) double every 10 years. Although the ground rent costs may cost little initially, they would have grown exponentially over time to the detriment of the potential purchaser. Within the space of a mere 50 years, the ground rent would have risen to an incredible £8,000 p/a: making the property almost impossible to sell as the ground rent due per year becomes disproportionately high and would have discouraged any potential purchasers in the future.


Furthermore, options such as purchasing the freehold - which would normally negate the obligation to make ground rent payments - is, in many cases, not a feasible option for ‘virtual freeholds’. As the cost of the freehold purchase includes compensation to the freeholder for loss of future ground rent – in this case 999 years of future income - the total cost of the 'freehold purchase' would be exorbitant and simply unaffordable!

 

Flat owners are often unaware of the effects of these ground rent schedules, as the clauses are buried in the small print of their leases and are regularly missed by their solicitors. When purchasing any property - particularly new-builds - solicitors must inform their clients about t