Leasehold Titles – A Concern for Home Owners?
Following the news in April that housebuilder Taylor Wimpey have set aside £130 million and apologised to leaseholders after attracting criticism for rising ground rents on leasehold houses sold, SLC Solicitors provide guidance on when you should expect a property to be leasehold, and what to look out for in the lease.
Taylor Wimpey attracted criticism for selling leasehold houses which are usually sold freehold. (Flats, being part of a larger building, are more commonly leasehold). Historically many houses on estates were sold on long leases rather than freeholds. This is less common today, though as was reported in the press last year, it appears to be on the increase. Despite the press criticism, a leasehold interest in a house is a perfectly valid form of ownership and has a capital value so prospective purchasers should not be deterred completely but should proceed with caution.
Taylor Wimpey have pointed out that the leasehold houses were cheaper at the point of sale than a freehold and that purchaser’s were advised there would be an additional premium if they wanted to purchase the freehold at a later date.
PURPOSE OF LEASEHOLD INTEREST
The formation of a long lease allows restrictions to be placed on the use of the property and to be enforceable against future owners, which would not be possible in freehold ownership. This allows the landlord to control and enforce covenants for repair and maintenance and usually to repair common parts by charging all the owners a service charge.
DISADVANTAGES FOR LEASEHOLDERS
The main disadvantage of a leasehold title for a leaseholder is that the lease is for a fixed term (usually 99 or 125 years) which will eventually expire and the tenant will need to either request a renewal or extension from the landlord, who will charge an additional premium, or, purchase the freehold, again for an additional premium.
Some leases of houses are labelled as “virtual freeholds” which is a slightly misleading term, merely meaning that the leases are very long, commonly 999 years, which means they will not have to be renewed for about 900 years.
The leaseholder will also usually have to pay a ground rent to the landlord over the length of the term. The ground rents complained of in the Taylor Wimpey situation double every 10 years which means they can soon escalate beyond the purchaser’s original expectation to significant sums. There have been press reports of property purchased for £101,000 that is now valueless as the ground rent has risen dramatically to £8,000 annually.
A high ground rent will in turn make the renewal of the lease more expensive and make the property less attractive to a purchaser. It is important when considering purchasing a leasehold property (or when extending or varying an existing lease) that you look closely at the ground rent provisions and ask for advice on whether the level of ground rent would be commonly found in the local area.
Taylor Wimpey have pledged the monies towards reducing the ground rents for those homeowners affected by the doubling ground rents on their sites.
Leases will reserve to the landlord the right to forfeit the lease in the event of the leaseholder’s breach of covenant or non-payment of the ground rent which is a significant threat as, the lease having been brought to an end, the leaseholder’s interest in the property is cancelled and they lose the value of their interest without compensation.
With long leases it is relatively rare to see restrictions on to whom the property can be transferred, but this should be examined in all leases for certainty on the requirements. It is common for leaseholders to have to notify the landlord on transfer so they can update their records about ownership of the property.
It is common in leases for there to be restrictions placed on the leaseholder in respect of work that can be undertaken at the property, particularly if the homeowner wants to extend the property or carry out structural alterations. The consent of the landlord is often required and the landlord is entitled to pass on to the leaseholder costs he incurs (such as legal and surveyors fees) in providing consent.
As with any property purchase, the purchaser is making a significant investment and it is essential to obtain the correct advice from professional advisors to avoid finding yourself in a situation that you did not anticipate. Ensure that you read the lease and ask questions about it to fully understand what is being offered as the principle of caveat emptor (let the buyer beware) applies to land and the buyer must find out everything they need to know prior to committing to the purchase.
Should you require any assistance with leasehold property please contact Analise Broomhall, firstname.lastname@example.org