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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.

Read about Leasehold

 

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Leasehold property buyers guide

Leasehold property buyers need to be aware of several things if they want to ensure a worry free purchase.

In England, there are two main ways of owning property:

Freehold – where you own the property and the land it stands on.

Leasehold – where you own the right to live in the property for a period of time, as set out in the lease.

How do I know if its freehold or leasehold?

It is essential to establish the legal title before making an offer or commitment to buy. If buying a new build, the developer should be upfront about whether the property is freehold or leasehold. With an older property, you can either ask the estate agent or check the land registry website.

Most flats are owned on a leasehold basis, where the landlord retains the freehold title to the whole building. Each leaseholder will be obliged to contribute to the cost of maintaining, insuring, and managing the building. The exact costs and terms will be set out in the lease.

What to look for in the lease

The first area to check is the terms and conditions concerning the ground rent. Some freeholders do not charge a fair ground rent, or a will charge a low amount initially but then increase it quite rapidly over the length of the lease. Also check the charges for renewing or extending the lease as these can vary considerably.

Often, the freeholder will charge for granting permission to make alterations to the property. On other occasions, the freeholder may impose an unreasonable charge for transferring the freehold title to the leaseholder.

Make sure the lease has a long time to run and that you have a legal right to renew the lease, and at a reasonable cost. It’s these additional costs that can have serious implications, particularly for first-time buyers who may already be on a tight budget.

Selling the property on

As long as the ground rent is minimal, owning your home on a long lease will not really be any different to owning the freehold.  Leasehold flats can be bought and sold in the same way as freehold properties. However, the length of time left on the lease will affect the value of the property.

If you already own a leasehold property and were not advised about ground rent fees or the full terms of the lease by the firm of solicitors that dealt with your purchase, you can make a complaint to the firm.

If you would like more information about owing leasehold property you can download our Guide to Buying Leasehold Property

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Leasehold property: on the road to reform

Leasehold property has gained much publicity and for several years, the government has been promising an overhaul of the leasehold practice.

Last year, the government announced it intended to ban the sale of new leasehold houses and cut ground rents on new apartment leases to zero.

It is now under increasing pressure to go even further in dealing with the issue as millions of leaseholders’ struggle with onerous ground rents, unfair service charges and exploitative informal leases that offer no legal protection.

Following a two-year investigation, The Law Commission has now made a series of recommendations to government that if implemented will transform the leasehold property market.

Proposals include replacing leasehold with “commonhold” and increasing lease extensions to 990 years instead of the current 50 or 90 years offered by landlords.

Commonhold is not a new concept but is not widely offered. Under commonhold owners buy a share of the freehold to their property in addition to buying the leasehold title, thereby increasing the value of their own property and removing ground rent charges. Owners can form self-management groups which gives them more control over repair and maintenance costs.

Currently, extending the lease leaves the owner with the landlord’s legal costs as well as their own. Under the new government proposals landlords would no longer be able to pass on their legal costs.

Sarah Naylor, partner and head of commercial and property, commented: “The problem has arisen because many people buying new build homes from housebuilders and developers have not been fully informed about what leasehold means for an owner. Because of this, many owners have ended up in financial difficulty or with properties that they cannot sell on.

“Setting a new statutory limit and capping the level of fees will come as a welcome relief to many leaseholders.”

The Law Commission recognise that there is likely to be opposition from developers. It says that there will need to be strict intervention by government – possibly going as far as giving developers no choice in the matter.

Whether the government opts to introduce the commonhold model as compulsory, optional or offer incentives to developers remains to be seen.

Should government opt to retain the leasehold model, the Commission has said that buying the freehold must be made significantly cheaper and ground rent charges should be removed.

Earlier this year the Competitions and Marketing Authority said it had found ‘serious issues’ with leasehold properties and would launch enforcement proceedings against those responsible.

Housing minister, Luke Hall said: “We will carefully consider the Commission’s recommendations, which are a significant milestone in our reform programme as we create a better deal for homeowners.”

Do you need expert property advice? Email info@athertongodfrey.co.uk or call us on 01302 320621

 

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Buying leasehold property – serious traps to avoid

The leasehold property market is back in the news after a report by the Competition and Markets Authority (CMA) claimed that buyers are being treated unfairly and are charged unreasonable fees.

The report comes amid long running concerns raised by consumer groups and MPs about the costly fees and onerous terms in many leasehold contracts.

The CMA said it had uncovered some ‘serious traps’ that buyers find themselves in after being misled by property developers, and warned that it will take action against the companies involved.

Buyers not aware

Some buyers had not been told upfront that the property they were buying was leasehold and were completely unaware of what that actually meant to them.

By the time buyers had found out about the range of ongoing costs they had taken on, such as ground rent charges, it was often too late to pull out of the sale.

Sarah Naylor, head of commercial and property at Atherton Godfrey, advises: “Before you make any offer or commit to buying, find out whether the property you’re interested in is leasehold or freehold. The developer should be upfront about this in the case of a new build, and with an older property you can either ask the estate agent or check the land registry website.

If it is leasehold, pay particular attention to the ground rent fees, as these can increase quite rapidly over the length of a lease. Also check the cost of renewing or extending the lease. These additional costs could have serious implications, particularly for first-time buyers who may already be on a tight budget.

If you already own a leasehold property and were not advised about ground rent fees or the full terms of the lease by the firm of solicitors representing you, you can make a complaint to the firm.”

George Lusty, CMA’s senior director for consumer protection, said in a radio interview that they would be doing all they could to help people out of the traps they have found themselves in.

He added, “If we can attack and challenge these unfair ground rent terms, then they’re invalid – all the money that was collected on them isn’t valid and that has to be paid back.”

The outcome of the CMA investigation could see developers having to change the way they operate, facing legal action where they do not comply.

A spokesperson for the Ministry of Housing, Communities and Local Government said the findings were ‘deeply concerning’ and added: “In the past two years, the government has taken more action to stop unfair leasehold practices than ever before – including reducing ground rents to a peppercorn and banning the sale of new leasehold houses.”

If you would like more information, you can download a guide to buying leasehold property from our website:

CMA Investigation

The CMA is investigating potential beaches of consumer protection law in the leasehold housing market. If you are directly affected by these issues you can contact the CMA to contribute information to their investigation – visit www.gov.uk/cma-cases/leasehold which contains information about ow to contact the CMA and provides updates on the progress of their investigation.

 

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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