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Should I buy a leasehold property?

Under English law, there are two main ways in which property can be held – freehold and leasehold.

Owning the freehold means that the land owner owns the property outright, until they decide to sell it.

Owning the leasehold title means that the owner will have a legal agreement with a landlord (the freeholder) called a ‘lease’, under which the leaseholder will own the property for a set period of time. Whilst most of us think of a lease as something short term, it is possible to purchase a lease which lasts for hundreds of years.

Most flats are owned on a leasehold basis, whilst a landlord owns the freehold title to the whole building. This is necessary in this type of building, because the lease will set out each leaseholder’s obligations to contribute to the costs of maintaining, insuring and managing the building.

Leasehold flats can be bought and sold in the same way as freehold properties. The difference is in what you are buying and selling. If you buy a house on a freehold basis, you are buying the property and the land it is built on. If you buy a leasehold flat, you are buying the right to live in the flat for the number of years left on the lease.

However, the situation is different for houses. The necessity for the property to be held on a lease does not apply. However, many homeowners do own their homes on a long lease, whilst someone else owns the freehold.

Why does this arrangement happen? The freeholder will usually only collect a minimal amount of ‘ground rent’ from the leaseholder, often in the region of £3 per year. Furthermore, the law gives the leaseholder the right to extend their lease for a reasonable price. So why do freeholders bother retaining their freehold title? What do they get out of it? Why do they not simply transfer the freehold ownership over to the leaseholder?

There may be many reasons as to why the freeholder does not wish to relinquish their interest in the property. One such reason is that freeholders do not always charge fair amounts of ground rent. Sometimes the freeholder will sting the leaseholder with ever-increasing amounts of ground rent, which become a burden and make the property almost impossible to sell. In some cases, the freeholder will also charge the leaseholder for permission to make alterations to the property.

On other occasions, the freeholder will simply ask for an unreasonable sum to transfer the freehold title to the leaseholder. Leaseholders do have a legal right to buy the freehold of their house if they meet certain qualifying criteria, but buying the freehold under these circumstances can be a difficult process.

As a result of these unfair practices, the government has recently announced plans to look at banning leaseholds on new-build houses in England. Communities Secretary Sajid Javid commented that the ground rent practices are “unjust, unnecessary and need to stop”. Other MPs have described the situation as a “national scandal” and the “PPI of the housebuilding industry”.

In summary, it is acceptable to purchase a leasehold home, as long as you are careful with what you are buying. In most cases, the long length of the lease, combined with your legal right to renew your lease, will mean that your interest in the property is satisfactory. So long as the amount of ground rent is minimal, owning your home on a long lease will not, practically speaking, be any different to owning the freehold.

However, it is very important to ensure that you do not fall victim to unreasonable charges. If you are thinking of buying any type of property, or have a problem with a leasehold property that you either rent or let, please contact our Property team on 01302 320621 or email property@athertongodfrey to ensure that you receive expert legal advice.

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Property market braced for outcome of leasehold appeal

A small flat in Chelsea is at the centre of a property storm that could lead to thousands of pounds being shaved off the cost of extending a lease.

The flat in one of London’s most affluent areas has only 23 years remaining on its lease but the freeholder has requested £420,000 for an extension.

Behind the case is chartered surveyor, James Wyatt, who has challenged the way leases are valued, using so called ‘relativity graphs’. The case, Sloane Stanley v Mundy and others, has now made its way to the court of appeal and will be heard today (16 January).

Wyatt comments: “In 1996 the Grosvenor estate (owned by the Duke of Westminster) commissioned Gerald Eve and John D Wood to draw up graphs of relativity to set the price for lease extensions and buying freeholds. No one has had the time, effort or money to challenge them since. It’s a much bigger scandal than the ground rents issue and a real David and Goliath battle.

The big London estates will be particularly hit, but it’s not just about the London market. I hear from lots of people, many of them pensioners, who are trapped in declining leases and can’t afford to extend them. I know of one where the lease extension  should be £30,000 but the freeholder wants £50,000 and the pensioner can’t afford it.”

The Mundy case found that the graphs relied upon by freeholders significantly overvalues the freehold, meaning that for the last 20 years or so, leaseholders have probably been overpaying by as much as 50 per cent when they extended their lease or bought the freehold.

Any leaseholder with a lease of 80 years or less should be particularly interested in the outcome of this case.

Properties with short leases, that is anything less than 80 years, are far more difficult to sell and where the lease has less than 70 years to run, it can be particularly difficult, if not impossible to obtain a mortgage.

Throughout England and Wales, there are around 3 million people living in 2 million properties where the lease is less than 80 years; 490,000 of these being in London.

Author: Gail Harris