For years many homeowners in leasehold properties have been vulnerable to a raw deal, if their landlord chooses not to play fair. A new government enquiry seeks to establish the extent of the problem, with a view to achieving greater protection for homebuyers. Article by Nick Green.
Help may be on the way for people who own their homes through leasehold. The Competition and Markets Authority (CMA) has launched an investigation into unfair practices in the leasehold market, which can result in extra costs, restricted freedoms and stress for millions of homeowners.
With a leasehold, the homebuyer buys the property but not the land on which it is built (which is owned by the landlord or freeholder). The homebuyer (who is known as the leaseholder) will often have to pay ground rent, and also fees if they want to make changes to the property. A lease will last for a number of years (anything up to 999 years but more usually less than 100). However, if a lease runs out then the property reverts to the freeholder, leaving the leaseholder with nothing. For this reason, leaseholders are usually advised to renew their leases regularly so that they don’t get too short. Another option is for the leaseholder to buy the freehold (though in the case of flats this is more difficult, as the freehold is shared between the different apartments).
The CMA will be looking into two particular types of malpractice: mis-selling and unfair contract terms. The first area looks at whether homebuyers are provided with all the necessary information to make an informed purchase, while the second will look at issues such as excessive fees and ground rents.
The 80-year leasehold trap
A particular pitfall that leaseholders need to be aware of is the 80-year ‘leasehold trap’. Renewing a lease will always entail paying a fee, but if the lease has already fallen below 80 years, there will be an additional ‘marriage fee’. This comes about because renewing a lease will increase a property’s market value – the marriage fee is calculated as being half of this increase. So if renewing the lease will boost the home’s value by £10,000 then the marriage fee will be £5,000. This is on top of the renewal fee.
For this reason, any property with a lease of 80 years or less will become increasingly difficult to sell.
Homeowners held to ransom by unfair lease terms
Many UK homeowners have been caught in leasehold pitfalls of various kinds. In 2016 a Birmingham flat owner found that her ground rent was £8,000 a year (not £250 as she had been led to believe) and would double every 10 years. In another example Ian Rice, a Liverpool builder, found that altering or extending his property would require hefty permission fees. In May a case came to light of a nurse living in a leasehold flat who was billed £146,257 for repairs by Southwark council. And several private companies have been criticised for buying up hundreds of freeholds on new homes, thus preventing their purchase by homeowners (and potentially exploiting those occupants by increasing ground rents).
In England alone there are over 4 million leasehold properties, of which over a million are houses. In 2017 the Government announced plans to ban leaseholds on new build houses, though it has since backtracked to talk merely of a ‘cap’ and no new legislation has yet come into force.
George Lusty, the CMA’s senior director for consumer enforcement, said: ‘Buying a home is one of the most expensive and important purchases a person can make. So it’s essential they fully understand the contract they are signing, including whether they will have to pay more than they bargained for.’
Tips on leasehold properties
If you’re thinking of buying a leasehold property, think very carefully about it first and follow these tips.
- Hire a solicitor with extensive experience of leasehold contracts. Some contracts can be very cleverly worded into making you think you’ll pay less than you will.
- Ask your solicitor to tell you exactly how you can extend your lease if necessary, when you should do it and how much it will cost. Get this in writing.
- Also ask your solicitor to confirm for you the level of any ground rent and the extent of any additional fees.
- Ask your solicitor about buying the freehold - is it affordable and do they advise you to do it?
- Beware of properties (leasehold or freehold) where part of the property extends across a boundary (e.g. an extension above a neighbour's garage). Always check: do you have the freehold on the land beneath it?
- Aim to extend a lease before it reaches 80 years or less, or you’ll have to pay the marriage fee (equal to half the property’s increase in value).
- Be very wary of buying any property with a short lease (80 years or less) unless you have written confirmation of what it will cost to extend, and you are happy with this.
If you think you may be affected by problems concerning your lease, or if you simply want more information on leasehold arrangements, you can find plenty of guidance at the Leasehold Advisory Service.