The lowdown on leaseholds

If you’ve bought or are planning to buy a flat, chances are that you will own it leasehold – and you will be among a growing number of leaseholders who have bought apartments in big cities.

While, on average, 15% of properties in England and Wales are leasehold, in London and Manchester this rises to 53% and 46% respectively, according to analysis of Land Registry data since 1995 by conveyancer My Home Move.

Home in on inner-city areas in these cities, as well as other city centres in Birmingham, Liverpool, and Newcastle, and leasehold properties can account for more than 90% of homes. But, surprisingly, some new-build houses, as well those that are part of shared ownership schemes, are also leasehold.

 

The Department for Communities and Local Government recently estimated that in 2014-15 there were four million leasehold homes in England in the private sector and 1.2 million of these were leasehold houses.

In Scotland, most properties are sold freehold. While there are some leasehold properties, there are tighter rules to protect owners from bad management. In 2011, the Property Factors (Scotland) Act came into force, with managing agents (also known as ‘factors’) having to register and comply with a code of conduct and belong to a government-run redress scheme.

The rules for Northern Ireland differ from those in England and Wales. For further information, visit Housingadviceni.org/leaseholders-freeholders-and-ground-rent.

Sharp practices

If you have a long lease and the landlord or freeholder carries out their obligations to maintain the property, it can be a perfectly good way to be a homeowner.

However, unscrupulous landlords can try to cash in on their investment by using unfair terms when it comes to ground rents – which are usually set by the freeholder and paid on an annual basis by the leaseholder – or by using management agents who fail to maintain the building.

 

In its Housing White Paper in February, the government pledged to do more to promote “fairness and transparency for the growing number of leaseholders” and has consulted on a range of measures “to tackle all unfair and unreasonable abuses of leaseholds”.

It promised to review unfair terms on setting ground rents – which the freeholder can increase significantly throughout the lease period – and to give homeowners more choice, looking, for example, at “reinvigorating” commonhold properties, where each flat owner has a freehold stake in the property but is also a member of a commonhold association, which owns and manages the common parts of the development.

The government also highlighted the problems faced by buyers of new-build houses that are sold as leasehold and are marketed at a reduced price, who may not be aware that they will be more expensive to manage in the long run. Freeholds and ground rents of leasehold houses, for example, can sometimes be sold on with leaseholders left in the dark.

Consultation on the White Paper ended on 2 May, but, at the time of writing, the government has not given any further details on how far any new regulations will go – or when they will be implemented.

 

Emily Fitzpatrick, partner and head of leasehold enfranchisement at Hart Brown Solicitors, is disappointed with the White Paper. “I was hoping to see a reference to a Right of First Refusal for leaseholders of houses [where leaseholders are given the first opportunity to buy their freehold as is the case with flats], but this is not mentioned,” she says.

“I don’t think the law should be changed to ban the sale of new-build houses as leasehold, as they can represent a less expensive alternative to freehold where the difference in premium can be spread across the term of the lease by the ground rent payments. But I do think a Right of First Refusal could be introduced.”

 

The need for reform of what is essentially a feudal system has also been highlighted by consumer group the HomeOwners’ Alliance, whose Homes Held Hostage report recently revealed that 42% of leaseholders have no idea how many years they have left on their lease and 24% have leases running for fewer than 80 years, when it will start to cost much more to extend the lease.

When things go wrong

There is no doubt that trying to resolve any issues in writing with the freeholder before taking legal action will be cheaper and less stressful than going through the First-Tier Tribunal (Property) Chamber (FTT). Costs vary, depending on the complaint, but you could pay £100 to apply to the tribunal and a further £200 when a hearing is arranged, plus you may have to call expert witnesses and you’ll need to pay for several sets of paperwork to be prepared.

In the case of new-build houses, unless the house is part of an Estate Management Scheme leaseholders will need to apply to the County Court rather than the FTT.

One Moneywise reader, who prefers not to be named, has been in dispute with a new management company of her block of flats over service charges.

 

She says: “I have taken the company to the First-Tier Tribunal twice over service charges that were unnecessarily added to our account. Obtaining the refund due to us has actually cost us more in preparing documentation and court fees.”

Ms Fitzpatrick highlights that one of the problems with the FTT is that while a leaseholder can apply to the tribunal to challenge a service charge that the landlord has demanded they pay, the FTT has very limited jurisdiction to award costs.

“This generally means that leaseholders cannot recover any legal costs they incur even if they are successful,” she explains.

“On the other hand, if the leaseholder is unsuccessful in their challenge, it may well be the case that the leaseholder will be left paying the landlord’s legal fees.”

What to ask before buying leasehold

The Association of Leasehold Enfranchisement Practitioners (Alep.org.uk) recommends that you ask these questions when making an offer to buy a leasehold property:

What is the lease length?

What is the ground rent and how will it escalate in the future?

What is the shortest lease your mortgage lender will allow? This can be 75 to 80 years, so if the current lease length of the property you are considering is close to this limit, you can probably use this as a point of negotiation with the vendor.

What is the freeholder like?

Who is responsible for the maintenance?

If a managing agent looks after the property, how much will they charge?

What is the annual service charge and what does it include? For example, the freeholder will include buildings insurance in the service charges and may pick a more expensive policy than you would choose.

Are there restrictions within the lease – relating to subletting, making alterations or keeping of pets, for example – and how do they fit in with your plans and lifestyle?

Is there a head lease [where a head lessor has the primary lease and has subleased the property] or any other parties associated with the ownership of the property?

Jargonbuster

  • Leasehold

Owning a leasehold property is for a fixed period of time. You will have a legal agreement, called a lease, with the freeholder outlining the length of the lease and its terms. The property returns to the landlord when the lease ends.

  • Ground rent

An annual fee you must pay to the freeholder. This can remain the same throughout the length of the lease or can increase (in line with inflation, for example), as set out in the terms of the lease.

  • Service charge

Your lease will explain what costs your landlord expects to recover from you in providing services for your building. This can range from repairs and maintenance to central heating, lighting and cleaning of communal areas, plus buildings insurance. You may also have to pay towards a ‘sinking’ fund to cover major repairs, such as a new roof.

“We’ll have trouble selling our house”

Andrew Henderson and his family moved into a Taylor Wimpey development near Clitheroe, Lancashire five years ago. At the time, he was offered the chance to buy the freehold to his house for £4,500, but as he had a lot of moving costs he decided against it.

About six months later, a company that specialises in ground rent and insurance premium collection, as well as leasehold administration, bought the freehold of all 40 houses in the development.

Losing out: Andrew Henderson (above) bought his house (below) leasehold five years ago

Andrew has since discovered that the lease includes a clause that means his ground rent, which is currently £320 a year, would double every 10 years. He also has to pay a fee of £10,000 to the freeholder each time he applies for a major improvement, such as building an extension – and that’s before he’s hired an architect or builder.

 

A neighbour of Andrew’s recently enquired about buying his freehold and has been quoted around £40,000.

“If we’d been presented with the facts that if we didn’t buy the freehold, our ground rent would double every 10 years and that it would cost £10,000 just for the freeholder to say yes to any improvements, then of course we would have bought the freehold. We used the lawyers that the builder recommended and they didn’t point any of this out.

“If we want to move, we’ll have trouble selling the house and we might not get the asking price that we think it could be worth. One of our neighbours had their house sale fall through once the buyers found out about the lease,” he adds.

In April 2017, Taylor Wimpey apologised for the doubling ground rent clause in some of its leases and is negotiating with companies who have bought its freeholds to review this clause, setting aside £130 million to pay for this.

Further advice and information

Contact LEASE (Lease-advice. org or phone 020 7832 2500) to arrange a free 15-minute phone consultation or fi ll out a form for written advice.

To fi nd out more about your rights or to complain about a managing agent, contact the Association of Residential Managing Agents (Arma.org.uk or phone 020 7978 2607).

For further information on the First-Tier Tribunal and to download application forms, visit Gov.uk/courts-tribunals/first-tier-tribunal-property-chamber.