What does the Leasehold Reform Act mean for McCarthy Stone and Churchill customers?

The Leasehold Reform Act is being hailed as the biggest British property shakeup in the last 100 years. And it is hitting some retirement community property developers harder than others

The problems with leasehold

Since the 1920s a form of property ownership called leasehold has been causing controversy in the UK property market. It is often referred to as a feudal relic, originating with William of Normandy's declaration that all land in the realm belonged to him, to be granted temporarily to tenants in return for sworn service.

Leasehold means owning the property for a fixed, temporary term while paying ground rent and/or service charges to a freeholder who owns the actual land. This ownership model has been embraced by the two most powerful UK retirement community property developers, McCarthy Stone and Churchill Living.

Well documented scandals have highlighted exploitative practices by freeholders, developers, and managing agents. For example ground rents that double every five or ten years. A ground rent of £200 doubling every few years can quickly become astronomical.

So called "Fleecehold Estates" are where leasehold properties on new developments are sold with high annual charges for the upkeep of private roads or green spaces. Hidden fees and lack of transparency are often cited where the freeholders charge exorbitant administrative fees for permission to make minor home improvements, or leaseholders pay high service charges for building maintenance, insurance, and repairs with minimal explanation of how these costs are calculated.

Often leaseholds are mis-sold, with the buyers allegedly misled as to the potential resale values and ongoing costs.

The problems with leaseholds are so widespread that mortgage providers often refuse to lend on these properties, leaving the owners in homes that are impossible to sell.

Leasehold in retirement community development

Giant UK retirement community property developers McCarthy Stone and Churchill Living have both adhered firmly to business models involving leasehold property sales and ground rents which have often reportedly increased far beyond inflation.

The two developers' reputations have come under the microscope recently due to negative publicity detailing massive losses in property value when owners need to sell their homes.

Most of those losses are because the ground rent has consistently increased to the point where potential buyers no longer see the proposition as making financial sense.

McCarthy and Churchill have stubbornly remained committed to business models involving leasehold sales and ground rents, despite the main industry body, ARCO, tirelessly campaigning against the concepts of both leasehold and ground rent.

Unfortunately for McCarthy and Churchill, the government has come down on the side of ARCO and enacted legislation designed to protect property owners.

Leasehold Reform Acts

The Leasehold Reform Acts are a set of UK laws which give leaseholders stronger rights against their freeholders

The latest amendments of the Leasehold Reform Act (most notably the Leasehold Reform Ground Rent Act 2023) significantly shift the balance of power from the freeholders to the leaseholders.

For many retirement community property owners there are two highly impactful aspects of this 2023 act.

Firstly it prohibits the sale of new leaseholds except in exceptional circumstances from 2026. This will clarify and simplify the complex business of buying a retirement community property as ordinary freehold sales do not come with ground rents.

Secondly, existing leaseholds will have their ground rents limited to £250 per year and even this must be reduced to a peppercorn within 40 years: a huge saving for the leaseholders, a huge loss of earnings for the freeholders.

Can retirement community property developers adapt?

McCarthy Stone lobbied extensively against ground rent reform, arguing that retirement communities are different from mainstream residential leaseholds. McCarthy claimed that its ground rents have been fair, transparent, fixed for long periods, and used to fund communal facilities such as lounges, mobility scooter rooms, social areas which benefit residents directly.

The company expressed disappointment that no such exemption was granted and has promised to operate within the new laws in future.

Experts calculate that McCarthy will need to recuperate revenue elsewhere, predicting higher initial purchase prices, higher service charges and possibly even contingency fees at resale.

However McCarthy Stone state that they are developing shared-ownership and short term rental options to improve affordability - including partnership schemes which allow buyers to purchase part of a home and rent the rest, reducing entry cost.

Churchill Living came under scrutiny for issuing leases with ground rents just before the April 2023 deadline which banned them for new retirement schemes, by confirming leases in advance of occupation in order to continue charging ground rent for those specific developments.

This seemingly short sighted move was publicly criticised by Housing Minister Rachel Maclean as 'gaming' the new rules. Following that criticism, Churchill removed ground rent terms from all developments launched after April 2023, regardless of lease position, to comply with the legislation.

Churchill are expected to increase initial property purchase costs, although they have announced marketing offers to drive volume such as 'Move for Free' where they will cover moving costs for new owners. They are also expanding their traditional business model to include short term (six to twelve months) rentals.

Expert comment

Greg Wilson is the CEO of European Consumer Claims, the Henley based company seeking financial compensation for people who have lost life changing amounts of money buying retirement community properties.

Greg believes that everyone will benefit from the leasehold reforms, not least the developers themselves.

"This is all about transparency. McCarthy Stone and Churchill are used to selling their retirement community properties at attractively low prices compared to equivalent freeholds. Then they make significant sums of money from ground rent later. Unfortunately their customers regularly report being unaware of these additional, increasing costs and making life-changing financial decisions based on incorrect, incomplete and frankly confusing information.

"Both companies will need to remodel their businesses. They will doubtless still find ways to drive their profits, but it will have to be in a more straightforward way. Setting more expensive prices for the initial purchase seems the obvious way to recoup revenue.

"When there are no ground rents, the developer no longer has the ability to raise them, and any temptation the sales agent has to mislead the buyer about potential future raises is therefore removed from the equation.

"The essential, overall benefit to the phasing out of leaseholds and ground rents is that buyers will be able to sell at the normal profit expected of equivalent freehold properties when the time comes. People need this level of assurance.

"There is no doubt in my mind that people will be happier to pay more money when there are no unpleasant surprises later.

"In my considered, professional opinion the increased confidence will reinvigorate this vital sector of the UK housing market and subsequently protect senior citizens in need of varying degrees of daily support."

If you feel that you have been mis-sold a retirement community property and would like to explore your options regarding a financial claim, get in touch with our team for a free, no obligation consultation.