Leasehold vs. freehold ownerships: how does it impact you?
Following recent announcements from both the Government and Labour Party aimed at curtailing the leasehold housing system, the practise has been under scrutiny in the press and among the public.
But what is leasehold and why is it seen as a problem?
Although owning leasehold properties is common, there are certain aspects that buyers need to be aware of before signing on the dotted line. Failure to do this can lead to difficulties when selling the property or create problems when attempting to buy the freehold at a future date.
HM Land Registry data from 2018 shows Yorkshire and the Humber had the second highest proportion of leasehold house sales, with leasehold properties accounting for around 1 in 14 house sales that year. Only the North West showed a greater ratio, with more than a quarter of all house sales involving leasehold homes.
Further findings from the Office for National Statistics revealed that 25% of the overall property sales in South Yorkshire were leasehold. This figure includes the sale of flats, which are almost always leasehold.
Katie Bacon, conveyancer at Graysons Solicitors, said:
“A significant amount of property transactions undertaken by our firm relate to leasehold transactions.”
The leasehold scandal which saw 100,000 homebuyers trapped in contracts with escalating ground rent—some of which doubled every 10 years—spurred the formation of The National Leasehold Campaign. The group recently ran a petition, which gathered over 30,000 signatures, to abolish the leasehold system.
In June 2019, the Government also announced plans for all new-build houses to be sold as freehold, and ground rents on new flats to be cut to zero. However, no timescales have yet been confirmed and these new regulations will not impact existing houses or newly-built flats.
“This is a welcome development and will be beneficial to new property owners.”
Proposals from the Labour Party in July 2019 called for a ban on the sale of new leasehold flats. And their policy also states that occupants should be able to buy the freehold of their home for 1% of the property value.
Until any new regulations are put in place to reform the leasehold system, what do homeowners need to be aware of when thinking about buying a leasehold property?
What’s the difference between leasehold and freehold?
Before buying a property, it’s important to know the difference between freehold and leasehold ownership and the responsibilities that come with both options.
Leaseholders own the property for a fixed period, but not the land it stands on. When the contractual arrangement concludes, the ownership returns to the freeholder, who acts as a landlord.
Freehold properties, on the other hand, are owned outright along with the land they stand on, without any time limits.
As well as the typical mortgage, bills, repairs and maintenance, leaseholders may also have a number of additional fees to pay.
These can include:
- ground rent
- an annual service charge
- maintenance fees
- administration fees
“Significant costs can be incurred by leaseholders. Added together, these could result in a rather large additional bill on top of the usual outgoings for property owners.”
The freeholder (or an appointed management agency) of a leasehold property is responsible for running and maintaining any communal features and, in the event of a flat or apartment, the building as a whole. This includes insuring the building against accidental damage, fire, water damage and more. Leaseholders will have to pay a percentage of the building insurance.
If there are any late payments, interest on the money due could be applied, depending on the contract terms. Freeholders can also take court action against leaseholders, leading to eviction or repossession.
Freeholders currently control additional costs to leaseholders. However, to avoid being taken advantage of financially, leaseholders have the right to ask for an outline of the service charges to determine what they are being used for and how the total is calculated. Any supporting paperwork can also be requested.
Landlords/freeholders must consult leaseholders before carrying out any work that will:
- last more than a year
- cost over £100 a year
- cost more than £250
Although leaseholders are responsible for maintaining their individual properties, they can face a considerable charge to obtain the landlord’s permission to make any substantial changes to the structure of the property.
Greg Davies, senior branch manager at Reeds Rains, said:
“Freeholders can choose how the property looks and have the option to make changes to it, if they wish. On the downside, compared to a leasehold property, there is more responsibility placed on the owner to maintain the property and to bear the costs of doing so which, in some cases, could be high and unexpected.”
How significant is the length of a lease?
Before making an offer on a leasehold property, check how many years remain on the lease. According to the Money Advice Service, if a lease is for less than 70 years, it may be a struggle to get a mortgage, as lenders usually require that the lease runs for a further 25-30 years after the end of the mortgage. A number of lenders may even insist on a lease length of 80 years.
“If you are looking at a 25-year mortgage, you will need the lease to be at least 50 years. Different lenders have different criteria for this. The length of the remaining lease can also have an effect on the property resale value.”
An extension to the lease can be requested at any time. Under the Leasehold Reform Housing & Urban Development Act 1993, qualifying tenants—which usually means the original lease was for more than 21 years—will be able to extend the lease to 90 years once they’ve owned the property for two years. However, extending the lease involves a charge. It is also possible to extend a lease through negotiation with the freeholder
“The two principle things to check, in my opinion, when considering purchasing a leasehold property are the length of the lease and whether the ground rent is fixed or due to increase.
“It can be costly and long winded to extend the length of a lease and in some cases, ground rent can increase substantially.
“If the lease length is considerable and the ground rent is fixed, many buyers consider a leasehold property an excellent option, especially when considering they won’t be responsible for the maintenance and repair of the communal areas or ground.”
Commonhold, which is a new type of freehold ownership, allows homeowners to own the freehold of individual properties (e.g. a flat or office) in a building or an estate, instead of having it on lease. The freehold of the building or estate is owned and managed by a company—known as a commonhold association—consisting of the flat/individual property owners.
What to do if the landlord isn’t meeting responsibilities
According to research, 60% of UK adults say the leasehold system is a serious concern. This result has risen by 18% since 2015.
Although 40% stated they hadn’t experienced any problems, more than a quarter (26%) of leaseholders complained about the high cost of works and management fees, 22% objected to unfair service charges and 23% reported a lack of control over which major works are done.
The Right to Manage (RTM) was introduced through the Commonhold and Leasehold Reform Act 2002. It allows leaseholders to set up a management company and take on specific management duties, without having to demonstrate poor management or buy the freehold. This doesn’t require the landlord’s permission or a court order but there are a variety of conditions that must be met.
Alternatively, if at least 50% of qualifying tenants participate, leaseholders can buy the freehold, under the advice of a solicitor. But proof of bad management will need to be provided. Each homeowner would then own a share of freehold. This is referred to as ‘collective enfranchisement’.
This can be very expensive, as leaseholders would have to pay compensation for the remaining ground rent on top of legal fees and expenses. When the lease is for less than 80 years, freeholders can also demand half of the ‘marriage value’, which is the difference in price between what the flat is worth as a leasehold property and what it would be worth as a freehold property.
Although the future looks brighter for the leasehold sector, the government’s proposed measures won’t affect all leasehold properties. It’s important to seek advice from a solicitor and get as much information from the freeholder as possible prior to making any concrete agreements.
Kindly shared by Graysons Solicitors