Leasehold property ownership – a hot topic

There have been proposals by Labour and the current Government, which may result in the granting of leasehold to be prohibited in relation to newbuild houses.

If you own a freehold property, you will own the property and the land upon which the property is built. If the property is leasehold, the freehold of the property is owned by the landlord, with the landlord granting the tenant the right to occupy, let and use the property/land for certain purposes over a fixed period of time. Typically for 90 – 120 years.

Recently, the ownership of leasehold property has become controversial, as many tenants have encountered issues in relation to the level of ground rent they pay, the premiums they may be asked to pay in order to extend the term of their lease and also in relation to the restrictions they have to abide by.

There are many leasehold terms which are reasonable, and which work well long term for both landlords and tenants. These include ensuring that properties, particularly flats, are insured effectively, that service charge payments are split proportionately, and that the interests of neighbouring flat owners are protected in relation to future works and also any issues regarding noise and use of the property.

Prior to embarking upon the purchase of any leasehold property, it is crucial to ensure that you are clear about the following:

Ground rent

Historically, ground rents have been reasonably low. However, recently, the ground rent charged on leasehold houses have been fairly high, with provisions doubling the rent every 10 years or so. Ensure that you think about the level of ground rent to be charged in the future. You don’t want to be caught out on a future sale.

Extending your lease term

A leasehold property loses value once the term of the lease reaches 70 years or less. The cost of extending the term of the lease can vary considerably, in relation to the premium to be paid. Also, the leaseholder generally pays both their own costs and the freeholder costs. Therefore, leaseholders need to ensure that the lease term is in excess of 70 years.

Consents

Prior to purchasing a leasehold property, whether it be a flat or a house, think about what your future plans will be. This is in terms of any alterations or extensions you may wish to make. Many leases state that the freeholders consent is required for internal and external alterations, with a fee payable for obtaining this consent.

The Law Commission has considered whether leasehold could be replaced by commonhold. This is a system where the owner of a flat in a block holds the freehold, but becomes a member of a company which owns and manages shared areas.

However, there are currently 4 million existing leasehold properties in England and Wales, and so leaseholders do need to be vigilant in ensuring that they understand the lease terms and there are no nasty surprises.

Sarah Barnes is a partner and heads up the residential property team at regional law firm Napthens.