To make your home your castle, be sure who owns the drawbridge…
When, in December last year, new measures were announced by the Government that focused on tackling unfair and abusive practices in the leasehold market, most people were already focused on the festive season.
Fast-forward to today, however, and with the Spring housing market getting into full swing, it’s worth understanding the difference between freehold and leasehold property and the impact it could have on you, especially if you’re considering making a purchase in the coming months.
Here, FBC Manby Bowdler, Conveyancing Executive Chris Hodgson explains the different types of property ownership and the factors to consider with each.
The ever-increasing UK population, coupled with growing property prices, has meant that in recent years there has been a significant increase in houses being split in to flats and new build apartment blocks springing up. With this, has come an increase in leasehold arrangements, but given these are a simple means of managing such properties where there are multiple occupants, that should come as no surprise.
What is surprising, however, is that in the past twenty years there has also been a big increase in the number of houses being sold by developers, also on a leasehold basis. Indeed, it is now anticipated that there are 1.4 million leasehold properties across England alone.
It is with these new build leasehold houses where we’ve witnessed an increasing number of issues arise. Simply, these sales have seen ground rents set at much higher levels than the ‘peppercorn’ arrangements that were typical previously. Not only that, but they’ve also come with rent increases which, in the worst examples, have allowed leaseholders to double the ground rent every ten years!
It is these practices that the Government is now looking to tackle through a ban on leaseholds for almost all new build houses, and changes to ensure that ground rents on new long leases – for both houses and flats – are set to zero. The government has also said that it will be made cheaper and easier for existing leaseholders to buy their freehold, and that there will be routes to redress for those facing the most onerous terms.
As is often the case though, the exact timeline for these changes to take effect is yet to be announced although it is anticipated at some point this year. In the meantime, now is a good time, whether you’re a buyer or seller, to fully understand the different basis on which properties are sold so that the right questions can be asked, and the necessary answers are readily available.
The difference between a freehold and leasehold properties
With a freehold property, you will own the property AND the land it sits on. With properties of this type, there may be other, not so obvious, responsibilities such as maintenance of shared access roads and your conveyancer will advise on these.
A leasehold property, meanwhile, will see you buying the right to live in the property for the remaining duration of the lease, with the land, the structure of the building and shared spaces owned by the freeholder. That freeholder may be an individual landlord, or a property management company and they will usually hold the buildings insurance, consult with leaseholders about any works that are required as well as collect service charges from each leaseholder to pay for maintenance and managing such work. The owner of a leasehold property is effectively a tenant in a very long-term rental, having to pay an annual ground rent, asking for consent to make any changes to the property and being aware of the following nuances of the leasehold world:
The length of a lease: Leases of between 99 and 999 years are commonly granted and generally the value of a property will reduce as the lease gets closer to the end. Don’t, however, expect to snap up a bargain if you’re looking for a mortgage as lenders are unlikely to loan on a property with anything less than 60 years left to run on the lease.
If a property only has a short time left on the lease, you can ask the seller to seek an extension, but expect to pay for the benefit. A lease extension can be requested at any time by a leaseholder however the landlord is not obliged to grant the same unless you have owned the property for two years.
Ground rent: Ground rent normally only applies on leasehold properties and can either be in the form of a fixed charge, or one that will change over time. It is advisable to check out how much is being paid currently, but to also look through the small print to be sure there are no big increases on the way. If any escalation is written in, then it should not allow for a rise that is more than the retail price index.
Again, if you are seeking a mortgage, a lender will check overall affordability, not just in the headline purchase price, but also in the ongoing costs of ground rent and the service charges so you should bear this in mind too.
Service charges: Service charges can strike fear in the hearts of leaseholders, even when they have very deep pockets, as all work is likely to be relative to the size and standing of the overall building.
It is always advisable when investing in a leasehold property to ask for evidence of the service charge budget and the accounts for the past three years, as well as to ask around and get a feel about the freeholder. An agent will often assure you that it’s a big property management company with the right infrastructure in place, but if research shows they have a poor reputation in getting work done, or in the amounts being charged on, you’ll be glad you checked.
Repairs and maintenance: The phrase ‘first impressions count’ is never more important than when viewing a leasehold property - take a good look at how well things are maintained whilst you’re looking round and ask yourself if this seems to be in keeping with the level of the service charge being imposed and the associated activity reflected in the accounts. If everywhere is looking a bit run down, there’s no evidence of regular work being done in the accounts, and there’s very little being held in the pot for future works, you can expect a big bill in the future, or an increasingly rundown environment over time.
Finally, if you’re the seller, it’s always a good idea to get your ‘house in order’ by tackling paperwork before the “For Sale” board goes up. Forms requiring detailed information about the property and its fixtures and fittings will need to be completed before a contract pack can be issued to a buyer. By working with your lawyer in advance to prepare all the forms that will be required, you’ll be well prepared to answer all the questions any potential buyer may have for you.
For more information, contact Chris on 01743 266279 or firstname.lastname@example.org
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