The government has been saying for some time now that Britain’s ancient leasehold laws are overdue for reform.
The initiative stems from recent abuses of the leasehold system, where building companies have been seen to exploit unsuspecting buyers of new-build properties, often first-time buyers who are unaware of the implications of buying a leasehold interest, as opposed to a freehold interest.
The balance of power in the leasehold system, one which is virtually unique to Britain around the world, is deemed to fall too heavily in favour of the freeholder, that’s according to a new report in which MPs are calling for change.
The report produced by MPs sitting on the housing, communities and local government committee says that the leasehold housing system is “flawed” and open to abuse, with homeowners left at risk of “exploitation” because of onerous ground rents, high service charges and unreasonable costs to extend leases.
The government now has two months in which to respond to the committee’s findings.
Property Ownership Types
Basically, in English law, there are two main types of ownership: freehold, which means you own it the property and the land it stands on outright, and leasehold, which gives the leaseholder a right to occupy for a given and agreed period of time, to buy and sell the property, but they don’t own the land it’s built on.
Lease holders are in effect the tenants of the freeholder and they will pay an annual ground rent and service charges for maintenance, plus special charges for such things as alterations and lettings. These charges are often where the unfairness and disputes arise.
Currently, there are said to be around six million properties in England and Wales under leasehold, mostly flats and apartments in blocks, and most commonly in the capital – London. However, recently it has become an increasingly common arrangement for new build houses to be sold by development companies giving only a leasehold title to the new “owners”.
The Parliamentary committee found during their inquiry that many of these leaseholders were unaware of their legal position – the differences between freehold and leasehold – when they purchased “in particular the additional costs and obligations that come with a leasehold property”.
There are some critical issues when dealing with leasehold, which are important for any buyer to understand: the length of the lease, the amount of the ground rent and service charges and how these can multiply over time, the cost of renewal of the lease, the terms of the lease and its restrictions and the costs involved to renew or extend the lease period.
The legalities are highly technical and anyone considering taking on a lease should seek specialist (leasehold) professional advice.
Costs and Charges
Maintenance can be problematic and expensive when dealing with high rise blocks, so to even out the costs for leaseholder long-term, property freeholders and their managing agents often use sinking funds – this is a reserve a pot of money accumulated over time to pay for unexpected repairs and major works, for example a new roof or lift repair. This issue has been particularly highlighted with the cladding issue after Grenfell.
Leaseholders are often subject to many restrictions set in the leasehold agreement which means that permission is required from the freeholder to do many things, often with a hefty charge involved.
Sometimes a formula is included in the lease for increases in annual ground rent charges which can lead to them spiralling to astronomical levels. This is an issue the MPs intend to address and have suggested legislation to limit charges to 0.1% of the present value of a property, up to a maximum of £250 per year.