Dangers When Buying a Leasehold House
- Some lenders will not lend on a leasehold house
- A leasehold house may be hard to sell
There are many reasons to avoid leasehold houses…
Houses are usually sold with a freehold title (allowing use of the property forever).
So does it ever make sense for you to buy a house with a leasehold title (allowing use of the property for the length of the lease only)?
This blog explains the key characteristics of leasehold houses and reveals their dangers and disadvantages.
The big takeaway is that, given a choice, you will usually want to give leasehold houses a miss.
This blog covers:
1. What is a leasehold?
2. What is a freehold?
3. Leasehold houses of the past
4. Modern leasehold houses
5. Disadvantages of leasehold houses
6. Sharp practice by developers
7. Government proposals
8. Conclusion
1. What is a leasehold?
A leasehold is a type of title where you are entitled to occupy and use a property for a fixed number of years determined by a written lease.
Typically the lease term is at least 99 years but it can be as long as 999 years, seen as a “virtual freehold”. The leaseholder or lessee, pays an annual ground rent to the lessor, the person granting the lease (or their successor).
The big downside of a lease is the authorised period of occupation and use declines with the passage of time, ultimately reducing the market value and marketability of the property.
However a leaseholder can negotiate an increase in the length of the lease where required and, if that is refused, there is a statutory right to a lease extension of 50 years.
There is also a statutory right to acquire the freehold, a process known as “enfranchisement”.
However both procedures are subject to the leaseholder meeting certain qualifications and can involve significant cost.
2. What is a freehold?
A freehold is the best type of title. A person with a freehold title is entitled to occupy and use the property forever and is not restricted by a lease or the need to pay ground rent to anyone.
The owner of a freehold title is therefore free to pass the property to their heirs or successors, keeping the property in their family forever.
Unlike a leaseholder, a freeholder wanting to make changes to their property — such as building, converting or changing its use — does not have to get permission from a superior owner.
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3. Leasehold houses of the past
With leasehold houses of the past, typically created in Victorian times, the lease is usually very long, often 999 years.
The ground rent is normally very modest, a few pounds each year, with no maintenance or service charge applicable.
These houses still have the drawback of being restricted by whatever the lease states, but they generally justify the common description of being a “virtual freehold”.
The restrictions in the lease are often few and benign
4. Modern leasehold houses
In this blog the term “modern leasehold houses” refers to leases being created now as well as those created in the last two or three decades.
These leases can be seen as falling into two categories:
- Benign to leaseholder
- Not benign to leaseholder.
A lease should be seen as benign to the leaseholder if the annual ground rent is modest and there are no maintenance or service charges, with the homeowner being entitled to insure the building.
The ground rent should be a “peppercorn” or a “low” amount (under £200), with provision for modest or reasonable periodic increases or no increase at all.
Those leases not benign to leaseholders will provide for a significant annual ground rent, often in the £200 to £500 range, with provision for increase periodically, usually every 10, 15, 25 or 33 years.
How the increase is determined is set out in the lease. There are 3 main possibilities:
- Increase by a fixed stated amount
- Increase according to the retail price index
- Increase by doubling.
(Increases by the last two methods can lead to very high ground rents, adversely affecting marketability.)
In addition, service or maintenance charges may apply. In big developments, such charges can be onerous or expensive.
Obviously you should be wary of leases not benign to the leaseholder; all things being equal, they should be avoided.
5. Disadvantages of leasehold houses
The fundamental disadvantage of leasehold houses is the fact that they are leasehold rather than freehold.
Unlike a freehold house, where the owner and their successors can use and enjoy the property forever, the use and enjoyment of a leaseholder is limited by the length of the lease and its covenants, restrictions and regulations.
Once the length of a lease declines, it is possible for the leaseholder to get an extension of the term upon payment of a premium to the lessor. However that will be a significant cost and besides the cost becomes markedly more expensive when the lease term goes below 80 years.
That means if you buy a house with a new lease of 99 years, it is only 19 years before it becomes very costly to renew.
The further a lease declines below 80 years the harder and more expensive it will be to get a competitive mortgage or remortgage on the house.
Once it gets below 60 years, most mainstream lenders would not be willing to provide a mortgage, making the house less marketable — adversely affecting the price it is likely to sell for.
For these reasons, it is prudent to only consider new leases which are at least 125 years in length.
If you are buying a lease which was granted in the past (an existing lease), deduct the term of your mortgage (say 25 years) from the remaining term of the lease (say 90 years) to find out how long the lease will have to run once you pay off the mortgage.
On these calculations, you would be left with a lease with 65 years remaining when you pay off the mortgage (90 minus 25). Ideally you should look for a lease with at least 80 years left after you pay off the mortgage.
Another disadvantage of leasehold houses is that some lenders will not lend on such properties.
A further major drawback is that the use of a leasehold house is governed by the provisions of the lease. That lease may be restrictive in various ways — for instance, by requiring the homeowner to seek the lessor’s permission before applying for planning permission.
6. Sharp practice by developers
On top of the generic drawbacks of a leasehold house, you also need to be aware of the risks and dangers brought about by unscrupulous developers or builders of modern leasehold houses.
For many decades following Victorian times, houses were usually sold with freehold title.
However, in the last 20 to 30 years developers have started to sell houses on a leasehold basis. Sometimes there are convincing legal reasons why that should be so; however, more normally the decision to sell by way of leasehold seems to be based solely on a desire to boost profits.
By selling the houses by way of leasehold, developers can sell on the freehold reversion to an investor or management company which will gain an attractive fixed income from the yearly ground rents, usually significantly in excess of what they could achieve elsewhere taking the same level of risk.
To boost the price they can recover, some developers have unethically created leases with high ground rents plus aggressive methods of increase (for instance a doubling every 10 years).
By way of example, if the ground rent is £500 per year and doubles every 10 years, after 40 years the ground rent will be an eye-watering £8,000 per year. After 80 years it will be an astonishing £128,000.
These are abusive ground rent provisions and a subsequent buyer duly informed is unlikely to buy a lease containing such provisions, making such leases effectively unsaleable.
It is of course sensible to avoid the risk or danger of leases with abusive ground rent provisions by giving such leases a wide berth.
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7. Government proposals
The selling of houses blighted by abusive ground rents has been recognised by government as a mis-selling scandal and it has promised legislation.
It has pledged to outlaw abusive ground rents going forward, but it is not known whether there will be relief for homeowners who already own leases with abusive or extortionate ground rent provisions.
Campaigners have set up the National Leasehold Campaign to challenge leasehold title in general, which is considered by many as feudal and archaic.
The Guardian newspaper has reported that the government began a consultation process in October of 2018 and is proposing that most houses be sold as freehold with no ground rent. Where a leasehold is allowed the proposal is that the ground rent should be capped at £10 per annum.
However, it is evident that this matter is not a priority of the government since there was a previous consultation in 2017.
If you are buying a house with a leasehold title, the safe bet is to avoid leases which are relatively short (below 125 years) or contain non-benign or abusive ground rent provisions.
8. Conclusion
If you are purchasing a leasehold house, you should read the lease with great care, especially the ground rent and maintenance/service charge provisions.
Watch out for any provision in the lease which will prevent or restrict any plans you have for the property — such as adding an extension.
If there is a provision for the ground rent to increase at periodical intervals, calculate the ground rent at the end of each period all the way to the end of the lease.
Look out for abusive or non-benign ground rent provisions.
Ask your conveyancer in writing whether in their opinion the ground rent and service charge provisions are “fair and reasonable” and “are likely to adversely affect the marketability of the property in the future”.
Only if you are entirely satisfied with the reply should you proceed.
Generally a house with a freehold title is better than a house with a leasehold title.
You should be extremely cautious about buying a new house with a leasehold title, seeking and acting on the advice of your conveyancer throughout.
If you are buying a new house under the government’s Help to Buy shared ownership scheme, only a leasehold title will be available to you.
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Dalton Barrett
Rebel Property Coach
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