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Five problems with a leasehold property

If you are looking to buy a new home, you may find many of the properties within your price range are leasehold. Recent stories of leaseholders exploited by unscrupulous landlords have dominated the press, even giving rise to the term ‘fleecehold.’ Should you be concerned?

Claire Wicks, Legal Executive with Parnalls Solicitors, looks at some of the problems with leases, proposals for reform, and offers some sound advice.

The underlying issue with leaseholds

With a freehold, you own your home outright. In contrast, a leasehold interest only gives you the right to your home for a certain number of years, called a term. You have a continuing, contractual relationship with a landlord to whom the property will revert at the end of the term. Generally, this means you have less control than if you owned a freehold property.

Most flats have traditionally been created as leaseholds. This makes sense because it allows reciprocal obligations to be enforced and for costs to be shared, but some unscrupulous landlords abuse the system. Moreover, some new houses may have been sold as leasehold simply to create an additional revenue stream for the developer which they sell on to investors.

Escalating ground rents

As a leaseholder, you will have to pay your landlord ground rent for the right to occupy their land. Historically, this has been a small, or purely nominal, amount. However, in recent years, the market has seen a rise in the average level of ground rents as they have become an investment vehicle rather than just a way of acknowledging a landlord’s interest.

Most leases include a provision to increase the ground rent at fixed intervals, often a stepped rise or in line with inflation. You need to beware as some provide for the amount to increase exponentially. In these cases, the initial sum may appear relatively small but over time they increase dramatically, reducing the value and marketability of your home.

Expensive service charges  

A service charge is a way of ensuring that all leaseholders in a building contribute to the cost of its maintenance, and the provision of any shared facilities like car parks or communal gardens. The lease should also set out clearly which services the landlord must provide. Many leaseholders complain about the lack of control over the services they receive and the difficulty in challenging their cost and quality.

The cost of getting consents

A lease will restrict how you may use your property. It will also probably require you to apply for your landlord’s consent in certain circumstances, for example if you want to make structural alterations. In many cases, the landlord must not withhold consent unreasonably, and can only recover reasonable costs for dealing with your application. However, these costs could still be much higher than you expect, and the process of obtaining consent can be time consuming and stressful.

A lease is a wasting asset

Unlike a freehold, a lease is also a depreciating asset. Basically, the shorter the length of term left on your lease, the less it is worth. This may cause issues as the term reduces. Mortgage lenders will require a minimum length of term left on a lease before accepting it as security for a loan, and a shorter term is likely to make your property harder to sell.

You may not own as much as you think you do

A lease should set out precisely what you own. Unfortunately, the description of the extent of the property included in a lease is often complex and sometimes unclear. This can cause problems, particularly if there is an issue over who is liable for a structural repair, or if you want to extend your home. For example, in the recent case of Gorst v Knight, a landlord was able to prevent the leaseholders converting their cellar into living space because the lease did not include the necessary subsoil.

Good news, reform is on the horizon

The Law Commission is currently considering how to make it easier for leaseholders to extend their lease or to buy the freehold. At the same time, the government is looking at ways to make the leasehold system fairer. These include a ban on the unjustifiable use of leasehold for new houses and controls on the amount recoverable through ground rents.

The bad news is that any reforms may take years to become law, and their benefit to existing leaseholders may be limited. However, do not despair.

Your solicitor can help

There is no need to discount a property just because it is leasehold – just make sure that you seek expert legal advice.

Find a solicitor who is experienced in leasehold conveyancing and discuss your plans with them early on. They can check the lease provisions to ensure the ground rent and service charge are reasonable, and that there are no other onerous provisions which could catch you out later.

They will also make pre-contract enquiries, which can give you important information about how the building, and any common parts, are managed. These should also reveal whether there are any proposed major works planned, which would result in a higher service charge after your purchase.

If there are potential issues, your solicitor will explain these and may be able to offer some creative solutions. For example, if the term is short, they can advise you on any legal right to extend the lease, and how you can minimise risk by requiring your seller to initiate the process before you commit yourself to the purchase.

For further information about buying a leasehold property, or home buying in general, please contact Claire Wicks, Legal Executive in the Residential Property team on 01566 772375 or email wicksc@parnalls.com

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

                                       

 

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