With the introduction of the long-anticipated Building Safety Act in April, and the Leasehold Reform (Ground Rent) Act in June, you could say that in 2022 ‘It Was a Very Good Year’ for leaseholders, who were granted additional protections from landlords in relation to both existing and new-build properties respectively.
Broadly-speaking, the Building Safety Act 2022 protects qualifying leaseholders from the potentially expensive costs involved with ensuring that any historic building safety defects are remediated. The Leasehold Reform (Ground Rent) Act 2022 abolished ground rents for new, qualifying leasehold properties. Together, the new legislation forms part of the Government’s wide-ranging proposals for the most significant change to property law in a generation.
Despite the positive steps forward, prospective buyers should nonetheless be aware of the potential drawbacks of buying a leasehold property, compared to a freehold property. For any potential buyers who may be wondering what the key differences are, Let Me Entertain You.
Deteriorating Assets
First and foremost, buyers who are considering purchasing a leasehold property should be aware that a lease will be granted for a ‘term’. The ‘term’ of a lease refers to the number of years for which it is granted, and long residential leases are commonly granted for periods of 99, 125, 250 or 999 years. Whilst this means that some leases can continue to run until the next Millennium, in other cases a lease may be due to expire much sooner. For example, a lease granted for a term of 99 years in 1950 will only have a remaining residue of 26 years in 2023.
The majority of mortgage lenders will require a lease to have a certain length left to run, on top of the proposed mortgage term, and therefore some lenders will refuse to offer a mortgage if the remaining term is too short. Whilst most leaseholders will benefit from statutory rights to extend their lease, pursuant to the Leasehold Reform, Housing and Urban Development Act 1993, the lease extension process can often be costly and time-consuming.
Service Charges and Major Works
The buyer of a leasehold flat will need to ensure that they are satisfied with the management of the building in which the property is situated. The ownership of, and responsibility for, common parts and structural areas of the building (such as the foundations, roof, lifts, bin stores, gardens or car parks) will often remain with the landlord. Underlying issues with the historic management of a building can cause otherwise straightforward transactions to Come Undone.
At the start of each year, a prudent landlord will usually predict the level of expenditure they anticipate being required for the maintenance of the building and general performance of their management obligations. This annual payment is demanded from leaseholders by way of a service charge. A buyer should check whether or not the landlord anticipates any major works being required in the near future which will significantly increase the service charge above the present levels. However, emergency works to the building may arise without warning and may therefore be unaccounted for.
Restrictions – Alienation and Alterations
Similar to the buyers of a freehold house, purchasers of a leasehold flat may buy the property with the intention of carrying out works once they have moved in. A lease will, however, usually impose restrictions which limit the ability of leaseholders to carry out such works. It is therefore crucial to ascertain that the terms of the lease will not be unduly restrictive, and will not prohibit the works that a buyer intends to carry out.
Most leases will also include some form of restriction on ‘alienation’, which means the ability of a leaseholder to assign (i.e. sell), underlet or charge their interest in the lease. Occasionally, a formal licence may be required from the landlord before a lease can be sold to a particular buyer, or underlet to a tenant, and the landlord may require references or deposits before granting their consent. Such provisions should be determined before the lease is purchased, to avoid the risk of a landlord saying Somethin’ Stupid like ‘you can’t underlet the property’.
This is particularly important when considering the purchase of a property that is intended for use as a holiday home or ‘Airbnb’ letting. In Nemcova v Fairfield Rents Ltd [2016] UKUT 303 (LC), the alienation provisions in the Lease prohibited the flat from being used otherwise than as a private residence.
Ground Rents
Whilst the introduction of the Leasehold Reform (Ground Rent) Act 2022 abolished the imposition of annual ground rents in respect of most new residential leases, the Act doesn’t apply retrospectively, and therefore ground rents may still apply to leases granted earlier. It is common for annual ground rents to increase periodically, in line with fixed calculations or otherwise in line with variable increases in RPI.
The specific ground rent provisions in a lease should be carefully reviewed, to ensure that any required annual payments do not become prohibitively expensive in the future. It is a requirement of the majority of major mortgage lenders that any annual ground rent is ‘reasonable’, and that it is ‘fixed or readily established’. As such, extortionate or ambiguous ground rent provisions can lead to a bank being unwilling to lend on the property.
It has been widely reported in the media that some leases even include ‘doubling’ ground rent calculations. Any such calculations should be carefully performed – for example, a lease with an initial ground rent of £200 which doubles every 10 years will result in an annual payment of £102,400 after the first 90 years of the lease term. Doesn’t that seem a little absurd?
It’s not all bad
Whilst investment in a leasehold property can often prove to be lucrative, it is important to ensure that you instruct a Residential Property Solicitor who has extensive experience in dealing with leasehold properties, so that any of the above potential issues can be identified. You will then be able to take an informed view as to whether you are comfortable with buying the property, leaving you free to feel real love with the home that you live in.
If you are looking for a Residential Property solicitor please give us a call on 01279 295047 or complete our enquiry form and we will be in touch.