Buying a leasehold property: implications and avoiding the new-build trap

When you’re looking to buy a leasehold property it is important to be aware of the pros and cons. The leasehold scandal currently overshadowing the housing market, in which thousands of homeowners are trapped in new-build properties they cannot sell, highlights the importance of understanding the implications of a lease agreement before you buy a property.

If you purchase a freehold property you own it outright and the land on which it stands. With a leasehold agreement you own the property but not the land it is built on, and you pay a ‘ground rent’ to the landlord (or ‘freeholder’). Houses are normally sold as freehold, and flats and maisonettes as leasehold, but this isn’t always the case.

Shared ownership homes and new-build homes are increasingly being sold as leaseholds. In this guide, we help you to understand lease agreements so that you can avoid the pitfalls and the new-build property trap.

Freehold vs Leasehold

When you purchase a freehold property you don’t have to worry about paying ground rent, service and administration charges, the problem of a lease expiring, having to negotiate with a landlord to make changes to your property or any of the other challenges leaseholders face.

The disadvantage of owning a freehold property is the increased level of responsibility that comes with sole ownership. You have to find the money for repairs and maintenance and pay for your own building’s insurance, plus if you have anti-social neighbours there’s no landlord to address the situation for you.

When you have purchased the leasehold to a property, the landlord is likely to be responsible for repairs to the outer structure of the property and all the communal areas. They pay for buildings insurance and may deal with anti-social neighbours. You may also have the option to buy the freehold of the property from the landlord at a later date.

The disadvantages of a leasehold property are that you will pay annual ground rent, service charge, administration costs, and management fees to the landlord. You are likely to have to seek the landlord’s permission if you want to carry out home improvements, own pets or sublet the property.

The new-build leasehold scandal explained…

Newly built properties are increasingly being sold by developers as leasehold rather than freehold. Property developers can make a profit twice from leasehold homes because, not only do they sell the leasehold to a buyer, but they can later sell the freehold to a third party which is normally an insurance or an investment company.

As leasehold properties are generally cheaper than freehold, developers are able to attract buyers who think they have purchased a property that is value for money. Buyers then find themselves stuck with properties that incur spiraling ongoing costs and are virtually unsellable - here’s why:

• Ground rent increases

Ground rent is an amount of money paid by the leaseholder to the landowner to rent the land. This can vary from a ‘peppercorn’ charge (no rent at all) to thousands of pounds. Leaseholders have found that their ground rent increases by a huge amount, in some cases doubling every ten years.

• Service charge increases

Service charge covers things like gardening, electricity bills for communal areas, decorating costs, cleaning charges and more. Service charges can be ‘fixed’ or ‘variable’ and ground rents can increase over time depending upon the terms of your lease. The Association of Residential Managing Agents estimated that the average service charge bill in London is £1,800- £2,000 a year. Properties with high service charges can be more difficult to sell.[1]

• Short leases

The lease sold by developers may be for a shorter term than the standard 125 years which is usual for a modern purpose-built flat (see below for more about the implications of short leases).[2]

• No real right to buy

When leaseholders want to purchase the freehold to their property they find it almost impossible, even though they have a statutory right to purchase the freehold after owning the property for two years.

The freehold may have been sold by the original developer to a third party and so now the cost of acquiring it has increased so significantly that the leaseholder cannot afford to purchase it. In some cases, leaseholders have been charged 10-20 times the ground rent depending upon the number of years left on the lease and the value of the property.

Leaseholders may also find that they have to pay for the landlord’s legal costs as well as their own.

• Being a tenant in your own home

In addition to ground rent and service charges other fees called ‘permission fees’ are payable when leaseholders want to make changes of any size or type to their property, including painting their own front door!

When viewing a new-build property, be aware that the sales staff in the developer’s office are unlikely to be trained to advise you on the lease implications. Before paying a reservation fee to the developer check that it will be refunded in full if you decide not to go ahead with the purchase. The reason is that you will not be able to see the lease agreement before you pay this fee.

If the developer will not agree to refund your reservation fee, it is best to seek advice from a housing and property solicitor before paying. It’s advisable to use your own conveyancing expert rather than a firm recommended by the developer to ensure professional impartiality.

Next steps for those with a short lease

When you own the leasehold to a property you have the right to live there for a specified period of time, after which time ownership is returned to the landlord (freeholder).

Lease lengths are normally 125 years and can be up to 999 years. If you buy a property with a lease of fewer than 80 years it is likely to be difficult to sell later, and if the lease has less than 60 years to run it will be virtually impossible to obtain a mortgage.

If the property you wish to buy has a short lease, extend the lease before you buy. Under the Leasehold Reform Act 1993, if you buy a property without extending the lease you have to wait two years before you can apply for an extension. The Act means that most leaseholders are entitled to extend their lease by 90 years, subject to specific criteria. [3]

Be aware that once a lease drops below 80 years the landlord is in a strong position to charge you more money if you want to buy the freehold. On top of the charge you will have to pay to extend the lease, you will pay a ‘marriage value’ on the property. ‘Marriage value’ is the extra money property is worth once a lease is extended. This value is split 50:50 between the leaseholder and the landlord.[4]

If you are considering extending a lease it is vital to seek legal advice from a leasehold lawyer who can help you to negotiate the most favourable terms with your landlord so that aspects such as ground rent do not suddenly increase, and that you pay a fair price to extend the lease.

What is a sinking fund?

A sinking fund is an amount of money collected, usually as part of the service charge, to pay for any major work that might be needed to be carried out on a property in future. An example might be roof repairs or a boiler replacement. The advantage of a sinking fund for a leaseholder is that there will no large, unexpected bills from the landlord. The disadvantage is that if the property doesn’t need any major work then the fund will not be used, and there can be difficulties in getting unused money returned.

A leasehold lawyer can help you to avoid future disputes regarding the sinking fund by obtaining information about any major work that is planned on the property and whether the sinking fund has sufficient money to cover costs.

Other charges?

Many buyers are not aware of other charges when purchasing a leasehold property. There may be a charge for the Landlord’s Management Pack. This is the information the landlord has to provide to your solicitor relating to service charges, building insurance, maintenance, fire risk information, and proposed works to the property.

Landlords may also charge fees for things like a Deed of Covenant, and a Notice of Transfer and Charge. A Deed of Covenant is a document that you sign to show that you have agreed to the terms of the lease. A Notice of Transfer and Charge are issued to the landlord by your solicitor to confirm that you are the new leaseholder and to give details of your mortgage lender, if applicable.

Sometimes a lease may contain clauses which mean you have to pay fees to the landlord later. For example, you might have to pay the landlord if you want their consent to carry out alterations.

It is important to seek specialist advice from a leasehold lawyer so that you know about all other charges before you enter into a leasehold agreement.

QualitySolicitors – housing & property solicitors

If you are purchasing a leasehold property QualitySolicitors’ conveyancing experts can help.

A leasehold property can be a prudent and safe investment when you are fully informed about all the facts and comfortable with the financial and legal arrangements.

We are dedicated to protecting your interests, advising you at all stages of your purchase so that you make the best decisions.

To find out more please contact our leasehold lawyers on 08082747557

 

[1] Readers’ Digest, The service charge scandal explained, https://www.readersdigest.co.uk/money/property/the-service-charge-scandal-explained

[2] My Property Guide, Should I buy a flat with a short lease? http://www.mypropertyguide.co.uk/articles/display/10111/should-i-buy-a-flat-with-a-short-lease.htm

[3] MoneySavingExpert.com, What is a leasehold? https://www.moneysavingexpert.com/mortgages/what-is-a-leasehold/

[4] The Leasehold Advisory Service, Marriage Value, https://www.lease-advice.org/lease-glossary/marriage-value/