Property developer extraordinaire Ned Browne talks through the potential pitfalls of leasehold properties. If you aren't careful, you could find yourself paying far more than you bargained for. 

Freehold versus leasehold

man holding house

If you buy a freehold property then you own the building and the land upon which the building has been built. Almost all houses are freehold. 

Leasehold means that you “own” the property for a set period of time, but not the land on which the property sits. All leasehold properties have a lease, which, amongst other things, details the length of time you occupy and use the property. Leases can run from anything from 1 year to 999 years.

Once a lease drops below 80 years, the value of the property begins to falls and this drop in value accelerates rapidly once the lease drops to less than 60 years. The main reason is the difficulty of obtaining a mortgage for such properties. Lenders invariably stipulate a minimum unexpired lease term, typically 70 years.

Some lenders have a lower limit but usually, they have a minimum remaining term at the end of the mortgage. The choice of lenders will be limited if you have a short lease, which means you won’t get access to the best rates. 

Worst still, some leases are so short that the property becomes “unmortgageable”—cash buyers only need apply.

Read more: So you want to be a landlord?

 

Costs to leaseholders

The main costs leaseholders have to pay are ground rent and service charges. Some ground rents are very low and others can run to hundreds of pounds a year. Each lease is unique and the reasons for the various differences are wide and varied. 

Service charges include such things as maintaining communal gardens, electricity bills for communal areas, repair and maintenance of exterior walls, windows and roofs. You will also need to pay your share of the buildings insurance.

The freeholder (who is sometimes referred to as the landlord) will invoice you these costs. Even if your ground rent is minimal, make sure you pay this to ensure you’re not in breach of the lease.

Read more: Things to look for before committing to buying a property

 

Rogue landlords

freehold

Most freeholders are reasonable. However, there are unscrupulous freeholders too. Freeholds can be bought and sold on the open market. This has led to the situation whereby big companies have acquired thousands of individual freeholds. And, more often than not, the freeholders have no personal relationship with the leaseholders.

 

 

"Having the Right to Manage negates the chance of being at the mercy of unprincipled freeholders."

 

 

In a recent case I investigated, the freeholder tried to charge the two leaseholders £40,000 to replace their roof. This job should have cost in the region of £10,000. After much toing and froing and threatening email exchanges, the freeholder eventually backed down and agreed that the leaseholders could appoint their own roofers.

In effect, the freeholder was overcharging with a view to then getting a “kick back” from the builders. This is outrageous but not as uncommon as you would think.

 

Right to manage

In the example above, buying the freehold (more on that later) was beset with legal issues and the owner was reluctant to pursue this course of action. 

As an alternative, I suggested obtaining Right to Manage, which is a legal entitlement. This means that the leaseholders manage all the maintenance of the building and they notify the freeholder when work is being carried out. 

Having the Right to Manage negates the chance of being at the mercy of unprincipled freeholders.

 

Other issues with leases

If you’re a leaseholder and want to reconfigure, enhance or expand your property you need to apply for a licence for alterations. This can take some time and you will need to pay a fee. 

Some leases also contain restrictive covenants, such as which types of flooring allowed, when you can play music, what (if any) pets are allowed and a prohibition on using the property for any business activities. 

The latter is, with the growth in working from home, potentially more restrictive than it initially sounds.

 

Right to buy the freehold

leasehold

If you buy the freehold, you are responsible for maintaining, repairing and insuring the property. However, the benefits are numerous:

  • No more ground rent or service charges
  • The opportunity to extend your lease for peanuts
  • The opportunity to remove restrictive covenants
  • You will no longer be beholden to the freeholder

The fewer the flats involved the easier this process becomes.  In simple terms, you need 50% (or more) of the leaseholders on board to purchase a share of freehold. 

Your lease will still run alongside this but, collectively, you can amend your leases in any way that’s beneficial to all parties. For example, you could agree to increase all your leases to 999 years. For this, you would only pay legal costs.

To buy the freehold you will need to get a competent solicitor to serve a Section 13 Notice on the freeholder. Before you do this, you will need to get the freehold valued. The cost of buying the freehold will be affected by a number of factors, the main ones being the length of time left on each lease and the ground rent charges. 

Ideally, the former will be high and the latter will be low. Your solicitor will be able to appoint a specialist to value the freehold.

Most freeholders willingly agree to sell the freehold, as the valuation is formulaic. As such, why contest it? If they do they are highly unlikely to receive a higher compensation. But, freeholders are humans and humans are irrational. 

This means, in some cases, the purchase price will be contested and go to tribunal. Annoyingly, you will be liable for all the freeholder’s legal costs.

Note: you will need to set up a company to manage the building or find a managing agent who can do this on your behalf.

 

Extending the lease

lease

If you are unable to (or don’t want to) buy the share of freehold, you can extend your lease. You can ask the freeholder to extend the lease at any time. And you have the right to extend your lease once you’ve owned your property for two years. There are some exceptions, but these are few and far between.

As above, the cost of extending the lease depends on the current length of the lease and the ground rent. Ideally, you’ll agree upon a cost between you. But, if not, you may need to take the case to the Leasehold Valuation Tribunal.

 

"You have the right to extend your lease once you’ve owned your property for two years."

 

 

Beware: some freeholders will extend the lease for a low up-front lump sum alongside higher ground rent charges and more regular ground rent reviews. Avoid this at all costs. 

In a recent case, the freeholder had amended the lease so the ground rent was £500 a year with a right to double it every ten years. That doesn’t sound too onerous until you play things forward. In 60 years the ground rent would be £32,000 and after 70 it’s £64,000 etc. 

This means that, if you ever tried to buy the freehold in the future, it would be prohibitively expensive. Worse still, trying to extend the lease again would be hugely expensive too. After 100 years the property would be worthless to all bar one person: the freeholder.  

 

For more detailed advice head to the Lease Advice website

Read more property advice from Ned Browne

 

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