Leasehold Houses – what is the big deal?
Leasehold houses have received a lot of negative attention in the news recently and we are exploring the reasons why.
Traditionally, things seemed quite clear cut; houses were normally sold with freehold titles, flats with leasehold titles. So why have things changed? And why does it matter?
To answer this question we must first look at the differences between freehold and leasehold titles. Broadly speaking, having a freehold title over a property means you own that property and the land it stands on and you are responsible for its maintenance and upkeep. An owner of a property that has a leasehold title owns the right to live in a property for the length of the term set out in the lease agreement with the freeholder but does not own the actual property nor the land it stands on. When the lease ends, the property must be handed back to the freeholder (unless the lease can be extended) and any maintenance and upkeep is normally arranged by the freeholder or their managing agent but is then charged to the leasehold owners. In addition, usually ground rent is payable to the freeholder each year.
Recently, there has been a large increase in the number of houses which are being sold with leasehold titles. This is particularly the case for new-build properties. New developments are emerging all over the country but in many cases the roads, green spaces and other shared services are not adopted by the local authorities. Instead, the responsibility for these is left with the developer. The developer will usually appoint a third party management company to deal with these maintenance responsibilities, demanding an annual charge from the owners of the new-build properties for doing so. Although not all house builders follow this trend, those that do argue that it makes it easier to manage the developments and make them more financially viable.
Who has control over your property?
When a new-build leasehold house is sold, a new lease is granted by the developer to the buyer. The lease will be granted for certain length of time and will contain various rights, restrictions and obligations. And this is where the difficulties arise.
When a buyer buys a house they will assume that the house is theirs, that they can make whatever alterations they may wish to make, use the house for whatever purpose they desire and that they are in control of the amount of money being spent. However, a lease will typically limit a buyer’s rights to do such things and impose obligations on them that they had not anticipated.
They may want to erect a conservatory, only to find that before they do so they must obtain the consent of the developer and pay the developer a fee for doing so. They may wish to erect a satellite dish, swap carpet for wooden floors, change the windows, build an extension, paint their front door or convert the loft but again find they will first be obliged to obtain consent from the developer and pay their charges.
Equally, once the lease term becomes shorter a leaseholder has the right to request that the term of the lease is extended but will have to pay a premium, often resulting in payments of thousands of pounds. In short, they have no control over their property in the way they may well have envisaged when they bought their house.
Paying for the privilege of owning your home
Increasingly local authorities do not take on the responsibility of looking after new estates. This may be because they have not been requested to do so by the developer or because they are not keen to add to their already sizable burden of responsibilities. One of the main reasons developers sell new-build houses with a leasehold title is so they can set up a system for the upkeep and maintenance of the roads on the development, amenity areas and shared services if these are not going to be adopted by the authorities. To do so they will set up a management company to carry out such duties. Each property on the development will be required to pay a proportionate share of the associated costs of this maintenance and upkeep, known as the service charge.
Buyers have argued that this charge can easily change from year to year and they end up paying an increasingly large annual maintenance bill for works they have no control over and for an estate which is nevertheless a space open to be used by the public at large.
Ground rent provisions
Another point to bear in mind is that most leases will require a buyer to pay an annual sum of money to the freeholder called the ground rent. The ground rent varies considerably from estate to estate. The initial ground rent payable is usually made quite clear in the lease but the problems start when ground rents are due to be increased. The lease will usually state that the initial ground rent can be increased at periodic intervals.
Some will increase by amounts that are clearly set out e.g. an initial ground rent of £100 to be increased by £50 every thirty years. It will be obvious what the ground rent will be for the remainder of the lease and is not an onerous amount. Some leases will provide that the ground rent will increase only at the level of inflation. Where a ground rent increase is linked to RPI, the result is that you will technically pay the same level of ground rent throughout the term of the lease.
However, some will instead state that the ground rent is to double for example every ten years. This would be considered very onerous because a quick calculation will indicate that a lease with a £250 ground rent doubling every 10 years would result in the owner paying £4,000 per annum after 40 years and a whopping £128,000 per annum after 90 years!
It is therefore very important to check the ground rent provisions in a lease to make sure they are clear, fair and not onerous. This could have a huge impact on the marketability of a property and mortgage lenders will not be willing to lend on properties with onerous ground rent provisions.
How did this come about?
Developers are keen to make it clear that they aim to provide prospective purchasers and their solicitors with all the relevant information so that the buyer can make an informed decision. But buyers have alleged there has been a lack of clear information about what may lie ahead.
Often buyers report they have not been fully advised of the significance of purchasing a leasehold title instead of a freehold one and did not know that they would have to seek consent for any changes to their properties. They did not appreciate that they would experience difficulties selling their houses in the future because they do not own the freehold or that they would have trouble getting a new mortgage because the ground rent provisions in their lease were onerous.
It is important to appreciate that for some developments the reason for adopting the leasehold house approach is justified and understandable. Provided the buyers of such properties are fully informed of the set-up of such properties, the ground rent is low and certain and there are no onerous restrictions and obligations the scheme should work. The key of course is that any buyer must be allowed to make an informed decision. They should be allowed to be involved in the decision making process when it comes to the maintenance and upkeep of the estate and should be assured of their right to purchase the freehold title or make alterations to their property without having to pay large additional sums.
Your options – Buying the freehold
Some buyers have indicated they were advised by the developer there would be a chance to purchase the freehold title to their property at a later date. It is true that leaseholders are able to force the sale of the freehold to them when they have owned their property for two years. The difficulty is that by that point the original developer, having sold the last of the plots on the development, has often decided to sell the freehold title to a third party.
This is usually an investment company for whom buying groups of freeholds is a safe long-term investment. Whereas the developer may have initially been willing to sell the freehold title to an individual property for a relatively low premium, a subsequent investment company will expect a much higher fee.
The owner will have the opportunity to take the matter to the First-Tier Tribunal (Property Chamber) to decide how much the leaseholder should pay to buy the freehold but the leaseholder can also be held liable for the legal fees for both parties, meaning yet a further expense.
Before considering the purchase of a leasehold house it is imperative that you take legal advice from a reputable firm with expertise in this field. It is your legal advisor’s duty to explain the difference between a freehold and leasehold property.
In short, they must ensure you purchase the property armed with the knowledge you need to make an informed decision.
MPs have called for a reform of the leasehold system to avoid leaseholders in new-build properties essentially being treated as a source of profit. The Housing, Communities and Local Government Committee want to see a standardised document containing certain key features being provided to prospective buyers so they are better informed before agreeing to buy a leasehold property.
There is a consultation under way by the Law Commission on whether to scrap leasehold houses and flats and move to a different system altogether. In the meantime, plans are afoot to stop the sale of new leasehold houses and restricting housing developers by no longer being able to use any new government funding schemes for unjustified new leasehold houses.
Some developers have also changed their stance in recent times, confirming that moving forward, houses on their new developments will be sold as freehold only.
If you consider purchasing a leasehold property, Bennett Griffin LLP will be happy to assist you and give you the advice you need to make an informed decision so you are certain that the property you are buying is the right choice for you.