The UK property market is buzzing about leaseholds at the moment.
A lot of that coverage is negative press. Sketchy developers have been cashing in with scandalous wheeling and dealing. New legislation has made it difﬁcult for leaseholders to beneﬁt from their agreements. And (shock! horror!) some property owners don’t know that their leasehold means they don’t actually own their home.
According to the Financial Times…
“About 90 per cent of the newbuild property sold in London is leasehold, while some 40 per cent of all newbuilds in England and Wales are leasehold.”
That’s a big chunk of the property market.
We thought it was time to put together an article that helps to inform our readers so that you can make the right kind of property decisions. There is always money to be made and homes to be bought and sold. It’s just a matter of knowing what you’re getting yourself into, and what is available to you in terms of legislation and owner/buyer protection.
So, what is a leasehold?
We love a bit of heritage, but leasehold law comes from the Victorian era and can be tricky to navigate.
Here’s what you need to know:
- You only own the property for a certain amount of time, anything from 100-999 years
- There’s a legal agreement with the landlord or freeholder (person who actually owns the property)
- When the lease ends and you choose not to renew, ownership goes back to the freeholder
- You pay ground rent every year on top of lease fees
- There are conditions and you have to ask the freeholder if you can renovate
- A leasehold is most common with flats, but lots of new homes are also leaseholds at the moment.
What happens when a leasehold expires?
When the lease ends and you choose not to renew, ownership goes back to the freeholder.
Where did it all go wrong?
From ground rent scandals to the Upper Tribunal’s Sloane Stanley Estate v Mundy 2016 ruling, there is a lot happening that has contributed to the negative press surrounding leaseholds.
This excerpt from leasehold knowledge.com outlines one solicitor’s testimony at the All-Party Parliamentary Group hearings on leasehold reform:
“Homebuyers are “pressured” into accepting discounts to use recommended professionals – solicitors, mortgage advisors – to complete the deals.
Inﬂated prices are recorded on the Land Registry that ignore discounts – called “allowances” or “incentives” by developers – which can amount to £80,000 off the price.
Housing charities and housing associations then buy up the unsold properties unaware of the substantial discounts already obtained, homebuyers claim.
LKP questions whether developers’ bankers are aware that prices on the Land Registry may often be bogus.
Ordinary home buyers have also bought over-valued properties, and many are very likely to be in negative equity.”
The good, the bad, and the money…
Let’s start with the bad news.
If you are a leaseholder, there is quite a bit of it, we’re afraid. Aside from having to ask your landlord/the freeholder if you can put in that new bathroom, a leasehold can be a wasting asset. That’s because the value falls as it reaches the end of its term. Which means the value of your house or ﬂat also looses value when or if you try and sell it. Paying ground rent is also not ideal because it’s an added cost that you wouldn’t pay if you were just renting the property.
And the courts aren’t helping the matter. If you’ve found yourself in a bad leasehold deal, it could be difficult to exercise your rights – not to mention expensive. Leasehold Solution’s Managing Director Louie Burns, said:
Leasehold Solution’s Managing Director Louie Burns said:
“It is no exaggeration to say that 2016 was the worst year to be a leaseholder in recent times. From increasing the costs of seeking a resolution through the courts, to a seismic decision on how the value of leasehold extensions are calculated, to a new ruling that affects leaseholders’ right to manage their block, power has been steadily concentrated with already powerful freeholders, to the detriment of leaseholders.”
There is some good news though.
Like, extensions. If you’ve owned your home for more than 2 years, you can extend or insist that the freeholder sells you the property outright. You can also challenge things like service charges and force a change of managing agent for blocks of flats. Recently, there has even been a movement towards shares of freeholds, where flat owners join forces to buy the property outright from developers.
To extend or not to extend?
This is probably a good time to go and make yourself a cup of tea because this part requires some fresh brain cells. Ready? Ok, let’s get on with it then.
How to extend a lease?
There is a formula to extending a leasehold. It has to do with things like marriage value, the number of years left on the lease and how all that affects your mortgage.
The decision to extend a leasehold should not be made without some serious thought, but when done right, can also be incredibly beneficial. That’s because if you extend your leasehold at the right time, you can add to your market value. Just remember, in order to extend, you need to have owned (not lived in) the property for at least two years.
What’s rule Number 1#? Don’t let your leasehold go under 80 years.
That’s because after the 80-year mark you pay 50% of the property’s ‘marriage value’ (increase in property value after a lease extension).
How to make money from a leasehold
With all the doom and gloom, it may seem impossible to make the most of a leasehold agreement. Don’t worry, The Property Hub has got you covered with their Everything You Need to Know About Leaseholds podcast.
Their advice is simple. There are profits to be made, but you need to DO THE MATHS and look at your extension cost. They also recommend paying cash. We already know that the property devalues the longer you hold onto it, so look at buying a leasehold that still has over 80 years on the clock. MoneySavingExpert.com has a great lease calculator. Use it.
Not all freeholders are bad
What does freehold mean?
If you’re purchasing a leasehold, you’re going to be dealing a lot with the freeholder, i.e the person that owns the property outright, has freehold tenure or, another way of saying it, has the tenure of the land or property. Now, that could be a chap like your neighbour, Ted, or a property developer.
Of course, you could be the one purchasing a property to become a freeholder. That means, as opposed to a lease where you pay a rental amount, or a leasehold where you’re paying ground rent, you won’t have a landlord or property owner to go through. Just make sure to watch out for flying freeholds, as they can come back to bite you (but that’s a different topic altogether).
What is the difference between freehold and lease? And what is flying freehold?
Of course, you could be the one purchasing a property to become a freeholder. That means, as opposed to a lease where you pay a rental amount, or a leasehold where you’re paying ground rent etc, you won’t have a landlord or property owner to go through. Just make sure to watch out for flying freeholds, which are a small part of your property built or reaching over the neighbours. Because they can come back to bite you (but that’s a different topic altogether).
Who to turn to if you’re in a leasehold ‘death grip’
Campaign to reform leasehold and end wealth eroding abuses – the leaseholdknowledge.com slogan says it all. That should be your ﬁrst step if you want to be well-informed about leaseholds.
We also recommend http://www.lease-advice.org, which has a lease calculator and a database of professionals that can help both freeholds and leaseholders.
If you’re in the UK property market chances are you’ll come across a leasehold
There are some 14 million leaseholds in the UK. If you’re in the property market, you can’t avoid them. Some property developers are being clever/sketchy, but that doesn’t mean investing in a leasehold is always a bad decision. Our advice, look at the remaining time on the lease before you buy. Know what you’re getting into. And remember, we are always here to help and guide you with your property decisions.
For more information…