Firstly, broadly there is nothing wrong with buying a leasehold property.
Over the years I have been involved in countless transactions involving leasehold properties. In prime central London, its common practice.
The important thing for any buyer is to know all the facts regarding the terms of the leasehold, to allow them to make an informed decision.
What is the difference between a freeholder and leaseholder?
In simple terms, a freeholder describes someone who owns the property in its entirety including the land it sits on, and as such there is zero ground rent to pay.
A leaseholder owns a lease which gives them the right to use the property for a fixed period. This period can vary; however, it is typically 99 to 125 years. Leaseholders do have a statutory right to extend the lease term by a further 90 years which in turn extinguishes the ground rent to zero(peppercorn). However, it is important to note that as the term gets shorter, the premium payable for the extension increases.
Leasehold properties are charged a ground rent as well as potential fees for permissions in relation to changes/alterations to the property.
What is the leasehold Trap?
This is where leaseholders are trapped with properties they find very difficult to sell on.
The two main contributors which can cause issues are rising ground rents and unreasonable fees relating to permissions.
In the lease it will set out details relating to ground rent payments. These ground rents can increase over time. For example, the first 5 years of the term you might pay a ground rent of £500 per annum to the freeholder. However, the lease may state that this ground rent doubles every 5 years following that. Meaning after year 15 whoever the leaseholder is at the time will be paying a ground rent of £1500 per annum, and in turn as the leasehold term hits 30 years expired the ground rent will be at a whopping £3,000 per annum. And it keeps going. These rising ground rents will have a huge impact on any future lease extension premiums and as such may trap owners in properties which can be extremely difficult to sell on.
Freeholders can also charge fees to leaseholders to give permission for alterations. In some cases, this can be a simple as requesting to change a bathroom in a flat. The freeholder may say fine, you can do the works, but I require £5,000 to give my permission. Yes, you can negotiate, disagree, and argue it an unreasonable figure. However, it is something to be aware of which can cause escalating costs and hassle.
How to avoid the Trap
In simple terms make sure you have a competent Solicitor acting on your behalf who is looking after your interests. If required take advice from a leasehold surveyor to make sure you fully understand the terms of the leasehold you are considering.
Know all the facts to allow you to make an informed decision!
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Alexander WallPrevious Article