The Dangers Of Leasehold – 9 Things You Need To Know


The Law Of… Making An Informed Investment 

Before you say yes to a new address, Robert Godfrey, Partner in Professional Negligence and Dispute Resolution, explains the questions you should be asking about the property and the pitfalls of leasehold homes.

Are There Different Types Of Home Ownership?

If you purchase property in England and Wales you will either own a freehold or a leasehold interest in land.

Freehold means that you own the property absolutely, whereas leasehold means that you will own a property for a specified period of time. A typical term for a lease might be 99 years, 125 years or 999 years.

What Is A Lease?

Under the terms of a lease for a flat or maisonette:

  • You will have a contract with the landlord – this is the lease. This should include information about the rights and responsibilities both you and your landlord have.
  • Generally, the landlord is in charge of maintaining the structural parts of the property – this can include the entrance hall, exterior walls, roof and foundations.
  • You'll usually have to pay maintenance and repair fees, annual service charges, and your share of the buildings' insurance costs.
  • You are likely to have to pay ground rent to your landlord. 
  • You'll have to get permission from your landlord if you'd like to make any alterations (including additions) to the property.
  • You might also be subject to other restrictions, such as not being allowed to own any pets, or sublet rooms without the consent of the landlord. The landlord will usually charge a fee (sometimes a large fee) for giving their consent.
  • If you don’t meet the terms and conditions of the lease, then your lease might become forfeit. This means that the landlord can bring your lease to an end.
  • You are likely to have to pay additional charges when selling a leasehold property – such as for a leasehold information pack from your landlord.

The terms of a lease for a house are similar, but although the lease usually includes an obligation to pay ground rent, the responsibility for insurance and maintenance falls to the lessee (the person who holds the lease of a property).

The lease might also still contain obligations to obtain the landlord's consent for alterations to be made to the property.

What Should I Look Out For When Buying A Property?

When buying or selling a home or a flat, you should remember that flats are almost always sold as leasehold. This is because when multiple properties form part of the same building it is important to ensure that all of the property owners are bound by the same obligations and that appropriate arrangements are in place for the maintenance, repair and insurance of the whole building.

Usually, the landlord will maintain, repair and insure the building and the owners of the flats will all pay a proportion of the costs – these fees are called service charges or maintenance charges. Lenders will not generally lend on freehold flats.

Houses are usually sold as freehold. But, some houses are being sold as leasehold as this enables the landlord to charge ground rent and fees for providing information and consent for changes to a property.

What Should I Look Out For In Relation To Ground Rent?

Some developers have inserted clauses into new leases that have rapidly doubling ground rent – for example, a rent set at £200 – £400 doubling every 10 years.

This means that the ground rent quickly reaches a level that would be difficult for the owner to pay, putting them at risk of forfeiting the lease. The high rent received by the landlord also vastly increases the value of the freehold, making the cost of purchasing the freehold unrealistic for many home owners. Many lenders will also not lend on these properties.

These issues have a serious impact for the owners when it comes to selling the property, as they can make the property less appealing to buyers.

"Many buyers believe that this was not brought to their attention by their conveyancing solicitors when they purchased the property, which is problematic", explains Robert.

What Problems Are Caused By Short Leases?

Another important thing to be aware of is the length of the lease you're buying.

A lease with 80 years or less is considered a short lease and the cost of extending the lease becomes more and more expensive as the lease term becomes shorter.

Mortgage lenders also have limits on the length of leases and will not lend if the remaining term falls below a certain number of years – note that this depends on the individual lender.  If you're using a solicitor, they should advise you on the cost and resale implications of a short lease. 

It may be possible to extend the lease informally through an agreement with the landlord. If they agree to grant a lease extension, you will be expected to pay for the cost of the premium of the lease extension, as well as all legal and surveyors' fees. 

But, before you sign a contract it's important to speak to an independent, qualified surveyor in regards to projected costs. 

Alternatively, once you have been the registered owner of a leasehold property for 2 years you will generally qualify for the statutory right to extend your lease under the Leasehold Reform, Housing and Urban Development Act 1993.

How Can I Buy The Freehold?

Here's how you can buy the freehold of a flat or house.

Buying The Freehold Of A Flat

Leaseholders have a legal right under the Leasehold Reform, Housing and Urban Development Act 1993 to buy the freehold of their building together if they meet certain qualifying criteria. This is known as collective enfranchisement.

As with extending a lease, it is also possible to approach the landlord on an informal basis.  

Buying The Freehold Of A House

Leaseholders have a legal right under the Leasehold Reform Act 1967 to buy the freehold of their house if they meet certain qualifying criteria.

It is also possible to negotiate with the freeholder informally to buy the freehold by agreement. You should always make sure that you seek advice from an independent surveyor about the costs involved.

If you decide to take the formal route to buy the freehold, the Leasehold Reform Act outlines the procedure and timescales that are involved. If you don't manage to reach an agreement with the owner of the freehold the Act gives the First-tier Tribunal (Property Chamber) the power to make a decision on the price and terms of the freehold acquisition.

What Do I Need To Know About Buying Or Selling Leasehold Property?

If the property is leasehold, the conveyancing process is likely to take longer and there are also likely to be increased costs for both the buyer and the seller.

Landlords or their agents will usually charge for providing the information required for the sale of the property and the lease may contain restrictions or procedures that are to be followed when a property is sold again.

One of the first things you should do is to find out how many years are left on the lease, and this will give you  an idea of whether a lease extension is likely to be required as part of the transaction.

Why Do I Need To Use A Conveyancing Solicitor When Buying Or Selling My Home?

You will almost always need to use a specialist conveyancing solicitor when you're buying or selling a property.

Always use an independent solicitor, and avoid using solicitors recommended to you by a property developer or the landlord (if you're buying leasehold).

This is because sometimes property developers will recommend solicitors who aren't necessarily trained in the field and this could result in them, for example, failing to read specific clauses built into contracts.

This is dangerous, as you could end up agreeing to something that could leave you significantly out of pocket.

Is The Government Doing Anything To Tackle The Problems With Leasehold?

The consultation led by the Government on the problems with leasehold properties has now come to an end and we're waiting for the outcome.

At this stage, the Government has been looking at a number of proposals that include phasing out leasehold houses and ground rents, and excluding leaseholders from forfeiture possession because of arrears of ground rent. They would also like to see more compensation programmes by the developers involved. 

Consumer groups believe that the Government should go further and plan the eventual abolition of the whole leasehold system.

How Can Simpson Millar Help Me?

When you've bought a property with legal help, it can be devastating to discover that because of your solicitor's negligence you're stuck with extortionate ground rent or a worryingly short lease.

You shouldn't have to lose out financially because of this. If you find yourself in this position, get in touch with our expert professional negligence team.

You might be entitled to claim against the solicitors who handled your purchase if you are paying ground rent on your new build home and:

  • Potentially face significant increases
  • Have discovered that the cost of buying the freehold has gone up or been sold to another party who is seeking  higher price and as a consequence have struggled to sell or remortgage your property

Our team can review your case free of charge and if we believe that we can help you claim compensation we will handle your claim on a no win, no fee basis.

We might be able to help recover:

  • The fees you've incurred as a result of the freehold being sold on to a third party who has increased the costs
  • The amount by which your property has decreased in value if the resale value has dropped
  • The additional increase of the ground rent that you might have been forced to pay

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