Realities of Leasehold Ownership

The increasingly dire chances for first time buyers to get on the property ladder in London are well documented in the press. Those that hoped the Brexit vote or even the triggering of article 50 would soften prices have not yet seen their hopes realised as the average asking price in London reached £636,777 in April 2017. Properties purchased by first-time buyers achieved a more modest average of £483,592 – the vast majority of which would be leasehold flats.

Now us Londoners are very familiar with renting flats but the decision between flat or house ownership, or technically leasehold and freehold ownership, is not to be taken lightly. Whilst there are many very content leaseholders across the Capital, there are also a good quantity of very frustrated ones and certainly a minority of buyers for who the decision to purchase a leasehold flat had particularly dire consequences.

Ground rents in particular have quite rightfully, been getting a bad press of late, often due to the presence of onerous review clauses that leave leaseholders with an obligation to stump up hundreds or sometimes thousands of pounds per year. The definition of what constitutes a modern ground rent has increased since the 1980’s when £50 rising to £150 was typical. Today, £250 – £350 is more likely, but it is the rent reviews or accelerators that make all the difference.

A ground rent that doubles every 25 years is not a problem because of the effects of inflation, but reduce this to every 10 years and it becomes problematic. First of all, crazy figures are reached towards the end of the lease, often hundreds of thousands of pounds. Secondly, the capital value of the property suffers, as any diligent solicitor will uncover the ground rent schedule and the buyer will either ask for a significant reduction in the price, or more likely, run for the hills! Thirdly, the cost to extinguish the ground rent using the Leasehold Reform Act, via either a lease extension or freehold acquisition, can be prohibitively expensive.

Also, the leaseholder may find it difficult to remortgage. Earlier this year, Nationwide announced that the maximum acceptable starting ground rent on all new build leasehold properties would be limited to 0.1% of the property’s value and unreasonable multipliers such as doubling every five, ten or fifteen years would also be unacceptable.

The Conservative Manifesto had included a promise to crack down on unfair leasehold practices, including escalating ground rents, but with them failing to achieve a majority in the recent election that was one of several policies that failed to make the Queen’s Speech.

Aside from ground rents, leasehold properties are also heavily restricted in terms of the alterations a leaseholder can make, subject to freeholder’s consent. Some leases will allow internal alterations ‘with landlord’s consent not to be unreasonable withheld’, which on balance tends to mean that apart from costs associated with a license to alter, the freeholder cannot charge a premium for his consent. This contrasts with a lease that expressly prohibits alterations, and where for their consent, the freeholder will often require a payment equal to 50% of the profit that arises.

The practice of freeholders taking half of the profits from a development is reasonably well understood these days, where there is a portion of land or property that is not within the leaseholder’s demise, with the most common example being that of a loft space. However, even if a leaseholder owns their loft space, their lease can still prohibit them from converting it, meaning that whilst it is perfectly fine for use as storage, a leaseholder will need to incur a lot of additional expense if they are to obtain the right to convert it.

To make this even more difficult, each case turns on its own merits and leases are often so poorly worded that neither expert surveyor or solicitor are able to confirm whether the leaseholder has or does not have rights. Even if the leaseholder is convinced that they can alter their property for nil premium and only the cost of a license to alter all their freeholder needs to do is put forward the opposite viewpoint and the only remedy is an onerous and expensive legal battle. I am convinced that there are premiums paid to freeholders all across London and the UK, where they were perhaps not actually due, but the leaseholder has simply weighed up the time and cost of reaching a determination and decided that it’s not worth it!

There is of course a solution to leasehold ownership and that is share of freehold ownership, but that can also be complicated by power struggles within the management company and differences of opinion as to the necessity of maintenance and repair works.

As with all property purchases, knowledge is key, and the purchase of a leasehold property should never be taken lightly.  The RICS Homebuyer Report for example, not only comments on the physical condition of the property but also alerts the buyer to specific legal concerns that should be cross referenced or referred to their solicitor. If a lease is short or contains complex ground rent or other miscellaneous covenants, a surveyor with leasehold reform experience can provide an opinion as to the impact, not just on value but on the realities of ownership itself.