Leasehold property – beware the pitfalls

Leasehold property - beware the pitfalls

Update 09/12/16: Due to concerns about unfair and unreasonable leasehold terms, the issue will be discussed by an All-Party Parliamentary Group on 14th December 2016.

Recent reports in The Guardian newspaper have uncovered what they are calling the ‘ground rent scandal’.

Homeowners in many parts of the UK are now facing huge difficulties when they try to sell their property.

The paper reports:

  • Ground rents doubling every 10 years with, in one extreme case, the increase backdated to 1961.
  • Owners of recently built properties now unable to sell because of the ground rent review clause within the lease.
  • Leaseholders being charged exorbitant sums to buy their own freehold.

The paper also cites figures that show property developers are increasingly offering homes for sale on a leasehold basis so the problems seem likely to escalate.

What is leasehold?

Philip Bullivant, technical supervisor at PM Property Lawyers, explains. “If a property is sold as a leasehold, the buyer acquires legal title which is, in a number of respects, lesser than a freehold title. The buyer pays ground rent to the owner of the land, the freeholder. Most flats are owned on a leasehold basis with residents paying a service charge for maintenance in addition to the ground rent.”

It appears that property developers are now also selling many new-build houses, which have traditionally been sold as freehold, on a leasehold basis.

Some leasehold properties now impossible to sell

Many homeowners have discovered that their leases include a clause to double the ground rent every 10 years. In many cases this has only come to light when they try to sell the property and find that buyers cannot get a mortgage. It seems that lenders are refusing to approve mortgages due to the high fees for ground rents in future. On these terms, an annual ground rent of £250 now would rise to £4,000 in 40 years. This is an unrealistic figure for smaller flats and houses, particularly those attracting first time buyers. These homeowners are likely to have stretched their finances already just to meet their mortgage payments.

Another issue arises from the practice of developers selling on leases to investors or management agents. As well as high fees being charged just to make an enquiry with the management agent, this is proving to be a particular problem for leaseholders who want to buy the freehold to their property. By law, leaseholders who have owned their property for 2 years can buy the freehold, but it seems that some managing agents are charging excessive sums. The Guardian reports the story of one couple who had been quoted around £4,000 to buy their freehold when they originally asked the developer how much it would cost. After the lease had been sold to a managing agent the figure rose to ‘between £15,000 and £35,000’.

Is there any help for homeowners or homebuyers?

Philip Bullivant explains how a good conveyancer can help. “A critical part of the title review process is the examination of the Rent Review provisions contained within the lease. Many residential rent levels are ‘index-linked’, for example, to the Retail Price Index. But often, what seems to be a simplistic review mechanism could potentially have the most serious consequences in the long term, particularly in terms of saleability.”

Make sure your conveyancer explains the terms of your lease so you understand what it means.

Harvey Harding, MD at PM Property Lawyers, adds: “Our dispute resolution department has expertise in challenging landlords at the First Tier Tribunal (formerly known as the Land Valuation Tribunal). So if you are already experiencing issues with your landlord do get in touch with us. We also have great experience in using recent legislation to either take over the management of leasehold blocks of flats or to buy the freehold by way of the leasehold enfranchisement.”

If you are considering buying a leasehold property or if you have concerns about your existing lease, please contact us on 0114 249 6926 and we will be happy to help.

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