With all the bad press that residential leasehold properties have received lately, one might wonder if there is any point in buying a leasehold property at all! Why not abolish leaseholds and simplify land purchase with just freehold ownership.
Unfortunately, it is not that simple. Under English Law, if there is an obligation to pay towards repair and maintenance of common items such as common grounds, lifts, main structure etc. then the system of leaseholds makes it easier for the landlord to collect such payments from successive owners of the properties. Therefore, there is still a place for leaseholds, particularly in the case of apartment blocks with communal areas. What are the issues? Essentially, leasehold means that you do not own the ground on which your property is situated. You have permission from the landowner (freeholder) to stay in the property for a certain number of years (called the ‘term’) as long as you comply with the terms and conditions set out by the freeholder in a document called the ‘lease’. There are certain statutory measures that assist leaseholders but other than that, the protection offered to leaseholders is largely what is provided for in the lease. Let’s have a look at some of the recent issues that have caused a stir in the Conveyancing market that you should be aware of when buying leasehold properties. The Ground Rent Scandal A relatively recent development with leasehold properties is that the vast majority of lenders now refuse to lend against leases that contain ‘escalating ground rent provisions’. This is where the ground rent multiplies at certain intervals. This is for two reasons. Firstly, because the value of the freehold is increased as a result of such clauses and makes the cost of extending a lease much higher. Secondly, where the ground rent has a potential to go beyond £250 (or £1,000 in London), then, under the current law, the lease can be classed as what is known as an ‘AST’ which makes it easier for the Landlord to gain possession of the property. Whilst this what not what the law-makers intended, this is the position in law at the moment and, until it is changed, leasehold properties with escalating ground rents are likely to be un-mortgageable. Lease extensions Leases are often granted for an initial term of 99 years (although there is no reason why they can’t be granted for a different term) and they need to be extended well before the term is up as most lenders require a certain minimum term when they agree to a mortgage. Leaseholders have a legal right to extend their lease upon paying a premium. One of the factors used in calculating the premium is something called ‘marriage value’ which comes into play when there are less than 80 years remaining on the lease term. This marriage value greatly increases the premium payable to extend the lease. Therefore, leases that have a short remaining term are often un-mortgageable until the term is extended, often at a great cost. Cladding Since Grenfell, most lenders now insist that any cladding on apartment buildings must be form EWS 1 (or equivalent) compliant. This has caused a great deal of anguish to those flat-tenants who now find that they are unable to sell or mortgage any leasehold apartments in buildings that do not meet these requirements. Every situation requires careful thought and professional advice to ensure that you and your assets are fully protected.
