July 2, 2018

Leaseholds – what you need to know

What is leasehold?

Owning the leasehold gives a homeowner the right to occupy land or a building for a given length of time. Initially a niche market, leasehold has shifted from primarily supporting the ownership of flats to a major form of tenure. Whilst there are of course some examples of leasehold working well, with over one fifth of properties in England and Wales now owned in this way, it is important that current leaseholders and future buyers are aware of the issues prevalent throughout the market.

The rise of new build properties

Over the past 20 years, the proportion of new build properties sold as leasehold has more than doubled. Although legitimate in some cases, it seems even standalone houses with no shared facilities or materials are being sold as leasehold simply as a means to create a revenue system for the freeholder. Many first time buyers have found difficulty in purchasing a new build property held on any other tenure. Leasehold buyers, particularly those purchasing for the first time, are also often unaware of the burdens, liabilities and costs associated with leasehold ownership. They may come to find that their lease contains an unfavourable provision, such as an escalating ground rent, or the need to obtain consent from the freeholder for any assignment, undiscovered at the time of their purchase. There is also evidence that lender trends are becoming more restrictive when deciding to lend on a leasehold property. The Telegraph reports that “even people with modestly rising payments are being blocked from new mortgage deals” and “many of the largest banks have banned ‘doubling clauses’ entirely.” Conveyancers, agents and potential owners/sellers need to consider such restrictions to avoid future problems in resale.

Ground rent

Ground rents apply to both flats and leasehold houses and are paid by leasehold owners to the freeholder or superior leaseholder, as dictated by the terms of the lease. Used as a means of income for the landowner, reports of escalating and onerous ground rent payments have increased exponentially in recent years. This has had a significant impact on leaseholders, placing greater strain on their budgets and in some cases trapping them in properties they are unable to sell. The Government’s response to consultation on this issue is to implement legislation whereby ground rents on newly created leasehold properties are capped at a peppercorn rate (zero financial value). Many lenders have gone further to impose maximum rents, otherwise they will refuse to lend on certain properties. The Government will however have to consider the effect on current leases which reserve a ground rent, when implementing legislation and guidance on ground rent. For example, it will remain to be seen whether current landlords will be forced to agree deeds of variation reducing the ground rents to nil.

Lease extensions

This does little to help existing leaseholders however. Although they do have access to an informal or statutory lease extension, the latter of which entitles a leaseholder to add 90 years to the existing lease term at a peppercorn rent provided they have owned the property for a period of two years, the cost of doing so has also risen exponentially.

Leaseholders extending their lease via the informal route may find their freeholder unwilling to do so without paying a substantial premium. The formula used to calculate the premium via the statutory route on the other hand produces a higher sum the lower the lease term left remaining. Further action is needed to support those leaseholders currently trapped in properties subject to onerous and escalating ground rent and unable to pay the premium to extend their lease or purchase the freehold. Although the Government has indicated it would like to extend the compensatory schemes that some developers have introduced to support new homeowners, these must go further and its reach focused on proactively.

Government response – future reform?

Many have called for leasehold to be abolished outright, replacing it with commonhold tenure introduced in 2004 by the Commonhold and Leasehold Reform Act. Commonhold aimed to give homeowners real ownership of their properties by providing ownership rights of a freehold ‘unit’, such as a flat within a building. At the same time, commonhold intended to give homeowners greater control by ensuring that shared areas are managed collectively by all owners. In addition, unlike leasehold, ownership of a commonhold property is not constrained by a lease term. Despite the advantages to homeowners, commonhold is yet to get off the ground, with fewer than 20 commonhold developments created since its inception. It is evident from the consultation that a renewed approach to commonhold tenure is at the forefront of the Government’s approach to reforms of the leasehold market.

Even with the outright ban of leasehold and the reinvigoration of commonhold, further revision to the law governing existing leaseholders will still be required.  A handful of proposals to reform of the current system, discussed throughout the Government’s consultation paper, can be summarised as follows:-

  • Modernisation of the home buying process.
  • An outright ban, or a financial cap on the initial annual ground rent, the maximum rate of increase and how often that increase can be applied.
  • Implementing simplified means of allowing leaseholders to purchase their freehold or extend their lease. Providing leaseholders with a Right of First Refusal on the disposal of the freehold reversion is one means by which the former could be addressed.
  • Limiting the sale of new build leasehold houses.
  • Taking a proactive approach to increasing awareness and transparency.

Government response to consultation ultimately demonstrates the significance of adequately addressing the issues currently faced by leaseholders. It will be interesting to see the extent to which the Government seeks to rectify those problems.

In the meantime, with many warning that any substantial reform to the market is years away, buyers considering purchasing leasehold property should be sure to instruct a specialist property solicitor. The importance of obtaining clear and detailed advice on any leasehold purchase cannot be understated.

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