Scrutiny from homeowners stuck in unsellable leasehold properties with spiralling ground rent has spurred calls from both the Government and Labour Party to reform the practice.
According to research, 60% of UK adults say the leasehold system is a serious concern. Although 40% of leaseholders claimed to not have experienced any problems, more than a quarter (26%) criticised the high cost of works and management fees, 22% objected to unfair service charges and 23% reported a lack of control over which major works are done.
HM Land Registry data from 2018 shows Yorkshire and the Humber had the second highest proportion of leasehold house sales, with leasehold properties accounting for around 1 in 14 house sales that year. Only the North West showed a greater ratio, where more than a quarter of all house sales involved leasehold homes.
The National Leasehold Campaign formed after the emergence of the leasehold scandal, which saw 100,000 homebuyers trapped in leasehold contracts with soaring ground rent. In an attempt to abolish the system, the group recently ran petition, which gained more than 30,000 signatures.
In June 2019, following the backlash, the Government announced plans for all new-build houses to be sold as freehold and ground rents on new flats to be cut to zero. However, no timescales have been confirmed and these new regulations will not impact existing houses or newly-built flats.
Proposals from the Labour Party also called for a ban on the sale of new leasehold flats. Their policy states that occupants should be able to buy the freehold of their home for 1% of the property value.
But until these improvements are made to the leasehold system, what should homebuyers consider before making any contractual agreements?
What is the difference between leasehold and freehold?
Leasehold: The homebuyer owns the property for a fixed period but not the land it stands on. When the contractual arrangement comes to an end, the ownership returns to the freeholder.
Freehold: The homebuyer owns the property outright along with the land it stands on, without any time restraints. The freeholder of a leasehold property is responsible for running and maintaining any communal areas and acts as a landlord.
What extra costs do leaseholders pay?
On top of the mortgage repayments, bills, repairs and maintenance costs, leaseholders also have several additional fees to pay. This may include ground rent, administration fees, a percentage of building insurance and charges to make substantial changes to the property’s structure.
Katie Bacon, conveyancer at Graysons Solicitors said: “Significant costs can be incurred by leaseholders. Added together, these could result in a rather large additional bill on top of the usual outgoings for property owners.”Depending on the contract terms, interest can be applied for late payments. Freeholders can also take court action against leaseholders, leading to eviction or repossession.
The additional costs are currently under the control of the freeholders. But for full transparency, leaseholders can ask for an outline of the charges and any supporting documents.
How important is the length of a lease?
It can be difficult to get a mortgage if the length of the lease is below 70 years, according to the Money Advice Service.
“If you are looking at a 25-year mortgage, you will need the lease to be at least 50 years. Different lenders have different criteria for this,” Katie said. “The length of the remaining lease can also have an effect on the property resale value.”
Under the Leasehold Reform Housing & Urban Development Act 1993, qualifying tenants can extend the lease to 90 years once they’ve owned the property for two years. However, this can involve a charge.
Greg Davies, senior branch manager at Reeds Rains, said: “It can be costly and long-winded to extend the length of a lease and in some cases, ground rent can increase substantially.”
Are there any benefits to leasehold properties?
Despite the criticism, Office for National Statistics figures revealed that 25% of the overall property sales in South Yorkshire were leasehold. This includes the sale of flats, which are almost always leasehold.
Katie continued: “A significant amount of property transactions undertaken by our firm relate to leasehold transactions.”
Although leaseholders have less control over the property, they have much less responsibility than freeholders, which can be a relief for some homebuyers.
Greg added: “If the lease length is considerable and the ground rent is fixed, many buyers consider a leasehold property an excellent option, especially when considering they won’t be responsible for the maintenance and repair of the communal areas or ground.”
Although the leasehold sector might see positive changes in the future, the Government’s proposed measures won’t affect all leasehold properties. Before committing to a leasehold property, it is vital to be as informed as possible and consult a solicitor to gain their expertise.