Leasehold Review

You may remember when we reviewed the Governments housing white paper back in February, that the Government was going to review some of the current practices around reselling freeholds and excessive ground rent review clauses.

We also commented about this again in March in our blog about leaseholds generally, and noted that you should be extremely cautious if looking to purchase a house (rather than an apartment) that was leasehold rather than freehold.

Housing spokesman John Healey said his party would end this "sharp practice" where properties are sold with a leasehold, and then the freehold is sold resulting in sharp increases in ground rent payable by the leaseholder.

The Scale of the Problem

Recently released figures show that nearly 4 million homeowners in England do not own their freehold (which is 21% of the housing stock), with 30% of these being houses rather than apartments. This would mean there are now in the region of 1.2 million houses in England which have been sold as leasehold rather than freehold.

 
Traditionally, ground rents have been somewhere between £150 and £200 per year, and are usually fixed for the term of the lease, usually 99 years or more.

However, more recently, properties sold as leaseholds, have changed the clauses relating to ground rent, which allow increases, usually on a sliding scale over the term of the lease. In one example, this scale for a 125-year lease, the ground rent started at £250, and then doubled every 10 years, meaning that after 60 years, the ground rent would be £8,000 per year!

These excessive ground rent review clauses have led some mortgage companies to stop approving mortgages against such lease terms. Whilst this may save you getting caught as the buyer of a property, if you are trying to sell one with such clauses already, you may find yourself unable to sell the property!

In other cases, properties have been purchased with a 125-year lease, and offered the ability to purchase the freehold after two years for £2,500. If this option was not taken up, when looking into purchasing the freehold two years later, the leaseholder has found that this cost had risen to £32,000 after the freehold had been sold to an investment company.

Although we have not seen many houses in Basingstoke come to market as leasehold, there is a lot of planned development over the next few years which may be impacted by this if left unchecked.

What is the Government Promising to Do?

The Government has now promised action, saying it will:

-          End leaseholds for new housing developments,

-          Consult on plans to set a minimum lease length for new flats

-          Introduce new laws to help leaseholders fight back at tribunals against unreasonable ground rent reviews.

Martin & Co Comment

Our advice at this time would be that if you are considering purchasing a leasehold property, either an apartment or a house, look very carefully at the lease conditions as they relate to extending the lease, purchasing the freehold and ground rent review clauses.

 

       -         Normal lease lengths are 125-years or more.

-         Normal ground rents are in the range of £150 to £250 per year for the length of the lease.

-         Be very cautious of ground rent review clauses that allow excessive rent increases. This may prevent the property from getting a mortgage, or worse still, prevent you from reselling the property later.

-         Check to see what the cost of increasing the length of the lease would be at a later date. In Basingstoke, this can routinely be £20,000 or more, plus solicitors’ fees.

-         Look carefully at the cost of any service charges, as these do not normally have limits and can easily increase substantially after you have purchased the property.

-          As we have commented before, be very cautious about purchasing a house that is leasehold rather than freehold. For a normal property, there is no justification for this.