Worried By Leasehold?
Mike Bracegirdle, a Partner specialising in Property law, considers the common concerns surrounding buying a leasehold house, and examines The Law Commission’s proposals for a change to the system.
What is leasehold?
When you purchase a leasehold property, you are only buying a right to use the land and building contained within the lease for a fixed number of years. Lease terms can be anything from 99 years to 999 years. The lease may provide for ground rent to be charge monthly or annually for the term of the lease and there may be provisions for this ground rent to increase.
Why are leaseholds deemed to be a problem?
Leaseholds have been under the microscope over the past year after it transpired that some home buyers are being charged exorbitant ground rents (see our article: https://www.butcher-barlow.co.uk/escalating-ground-rent-scandal-problem-houseowners/) Direct Line has estimated that the average ground rent is currently £371 per annum. Furthermore the Leasehold Partnership has claimed that over 100,000 home owners are trapped into contracts with spiralling ground rents.
A number of larger well known house builders have now changed their practise, with new properties being sold as freehold as opposed to leasehold. This is as a result of prospective buyers being worried about the possibility of the freehold being sold to unscrupulous companies who aim is profit from poorly drafted leases.
Is there a problem?
If you own a leasehold property it is important not to be panicked into seeking to purchase the freehold. Many older properties which are leasehold are subject to a 999 year lease which were granted less than 125 years ago. In these cases, ground rents tend to be fixed and as such there are no real issues for the leaseholder. They are easily mortgageable and in some cases the freehold is held by a Management Company in which each leaseholder has a share and can influence both the ground rent and, if applicable, the service charge.
The real issues occur are when:
- The remaining term is less than 80 years. It is then difficult to find a mainstream lender who is prepared to lend against the property; or
- If the ground rent is of the type which is commonly known as either a staircase or escalator, in which case the ground rent can double or even treble after a set period of years which in extreme cases dramatically reduces the value of the property.
Current System of Leasehold Enfranchisement
Leasehold Enfranchisement is the right for a leaseholder to purchase the freehold of their property. The current system of leasehold enfranchisement offers a solution to the problems highlighted above but in practice it is slow, complex and, for the leaseholder, very expensive.
The New Proposals
The Law Commission has published a summary paper on the proposed solution for leasehold houses. A full consultation paper is due to be published in autumn. The proposed changes are:
- Options for changing the valuation process, making it easier for homeowners to buy the freehold.
- Removing the requirement that leaseholders must have owned their property for two years before submitting a claim.
- Replacing the current right of leaseholders to purchase a one off lease extension at a high ground rent, with a right to acquire unlimited leasehold longer lease extensions without a ground rent. (The Law Commission is still consulting on the period of the extension which could be 125 or even 250 years).
- Improving the procedures (by simplification) to prevent protracted and costly disputes between the parties.
If you own a leasehold property and have concerns with the potential for ground rent to increase, or the remaining term of your lease is a approaching 80 years, or you have been offered the freehold to purchase by the developer or freeholder and need advice, contact our specialist property lawyers. https://www.butcher-barlow.co.uk/personal-services/leasehold-enfranchisement/