Should I be wary of buying a leasehold house?
A recent trend for new-build leasehold houses with spiralling ground rents has left some leaseholders ped and unable to sell. Here's what you need to know.
What does leasehold mean?
When you buy a leasehold property, you do not own the land on which it stands. The land is owned by a freeholder.
Freeholders are often referred to as 'landlords' when there is no managing agent looking after the property.
A lease is, in effect, a long term rental agreement that allows the leaseholder to use the property for a stated number of years.
Lease terms range from 40 to 999 years.
Generally the shorter the lease, the less saleable the property.
A lease will also set out any ground rent and service charges as well as any restrictions over how the property is used.
In the case of a leasehold house this might mean:
- Maintenance fees and annual service charges for any green areas or driveways you share with neighbours whose houses are built on the same patch of land.
- Ground rent
- Services charges
- The freeholder may not allow you to extend your property, carry out any major renovation works or sublet.
Why are leasehold houses controversial?
Many property and legal experts argue that there is no valid reason for a developer to retain the freehold of a house once sold.
It is argued that leasehold houses are conceived purely for the developer's financial benefit and at the expense of the leaseholder.
Spiralling ground rents
A common feature of leasehold houses is spiralling ground rent. This clause in the lease is the main area of controversy surrounding leasehold houses.
Some house leases stipulate that the ground rent will double every ten years. A new owner may be unperturbed by an initial annual ground rent of £500. However, the following table illustrates the impact of a doubling ground rent over time:
| Year | Annual ground rent if linked to RPI* | Annual ground rent with doubling ground rent |
|---|---|---|
| 1 | £500 | £500 |
| 10 | £597 | £1,000 |
| 20 | £728 | £2,000 |
| 30 | £887 | £4,000 |
| 40 | £1,082 | £8,000 |
| 50 | £1,319 | £16,000 |
| 60 | £1,608 | £32,000 |
| 70 | £1,960 | £64,000 |
| 80 | £2,398 | £128,000 |
| 90 | £2,913 | £256,000 |
* RPI for next 90 years assumed as 2% p/a compounded
As the above table illustrates, as time progresses, a doubling ground rent becomes prohibitively expensive. Leaseholders could become trapped - unable to afford the ground rent and unable to sell the house.
Spiralling ground rent clauses also make it difficult to obtain a mortgage.
The main types of ground rent schedules are:
| Ground rent schedule | Comment |
|---|---|
| Doubles every 10 years (spiralling) | Generally considered one to avoid |
| Doubles every 25 years | More acceptable. |
| Increase linked to RPI (Retail Prices Index) | Any increase is in line with inflation and is generally viewed as the fairest. |
Spiralling ground rents in the lease, along with potential restrictions in developing the property and the various fees payable to the freeholder, you must be very clear on what you are entering into before you buy a leasehold house.
I didn't know my house was leasehold when I bought it
Leasehold properties account for approximately 25% of residential homes in the UK.
Leasehold houses, although comparatively rare (when compared to flats) have become more common in recent years.
The Department for Communities and Local Government (DCLG) estimates the number to be between 1.4m and 2.9m - considerably more than previously thought.
Nevertheless, leasehold houses are a relatively new thing and as such, have caught out conveyancing solicitors who have assumed the properties to be freehold.
If your solicitor failed to spot the leasehold tenure of a property you purchased, you could grounds to sue. It is a conveyancing solicitor's job to warn you of any potential pitfalls of a property before you buy it.
If you purchased a new build house and your conveyancer was recommended by the developer, it could also be argued that there was a conflict of interest.
During the conveyancing process, your solicitor will have given you a 'Report on Title'. This report is the master document setting out everything about the property you need to be aware of, including any unusual or onerous aspects. This report should make it clear that the property is leasehold and any concerns, such as spiralling ground rent clauses, should be emphasised.
If your solicitor failed to address the leasehold issues and advise you accordingly, you may be able to take legal action to recover your losses.
Should I be wary?
Not necessarily. If you are thinking of buying a leasehold house, the key areas to focus on are:
- The unexpired lease term. If it is 80 years or under, the property is less desirable and you may have difficulty getting a mortgage.
- The amount of ground rent and the basis of any future increase.
- The level of service charges and the basis of any future increase.
- Any onerous restriction s over how you can use or adapt the property.
- The historical conduct of the freeholder. You can contact HM Land Registry to find out who the freeholder is and research the freeholder online.
You should instruct a conveyancing solicitor who is proficient in leasehold. If you are buying a leasehold house, ask the solicitor whether they are experienced with leasehold houses.
Leasehold houses - update 2024
The leasehold sector is currently under investigation by the Competition and Markets Authority (CMA).
In particular, the CMA is looking into:
- Escalating ground rents
- Unfair contract terms
- Mis-selling
- Service and permission charges
- Lack of checks and balances
The CMA announced a formal enforcement action against many of the UK's largest residential property developers as well as companies that have purchased freeholds from developers.
Some developers have already ceased selling new-build leasehold houses. How this news could benefit existing house owning leaseholders is not yet clear.
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