What is leasehold property?
There are two ways that property can be owned in the UK, through a freehold and a leasehold. A freehold owner is the person who has the main right of possession and use of the property. A freehold owner may create a lease over the land, and the person who buys the lease (the leasehold owner) has the right of possession and use over the land for the period of time that the freehold owner has designated. This can be any number of years and can be as many as 999 years, depending on the freehold owner. A leasehold owner will pay ground rent to the freehold owner of the land, often on a yearly basis.
The problem of ground rent
The issue surrounding ground rent is currently the biggest problem affecting the purchase of leasehold property. Ground rent is a sum of money paid by the leasehold owner to the freehold owner in exchange for renting the land or property. Historically, people would pay a ‘peppercorn ground rent’ – a very small amount of money, such as £1.
However, recently, ground rent has become a huge problem due to freehold owners including clauses in the lease that allow the ground rent to increase over time. Since many home buyers use the Solicitors recommended to them by the freehold owner when entering into a leasehold agreement, its easy for the ground rent clause to be overlooked and thus the buyers end up agreeing to the ground rent charges which are much higher than they expected.
The average annual ground rent is estimated to be at £371 at present, with the UK government estimating that it could go up to £10,000 by the year 2060. High ground rents can be a major problem. Most leasehold owners with extremely high ground rents, find it difficult to sell their leasehold properties on, as other buyers are put off by the high ground rent charges.
Other risks of buying leasehold
The length of time left on the leasehold is a big risk when buying a leasehold property. If there is only a short amount of time left on the leasehold, the value of the leasehold will be significantly reduced, and sometimes leasehold owners will find that they own a leasehold that is basically worthless. Thus, they cannot sell off their leasehold and it could costa significant amount of money to extend the leasehold, especially if the lease has less than 80 years left on it.
Leaseholds can also come with a lot of hidden costs such as service charges and management fees. If the freeholder uses a management company to manage the property, the management company will often increase their fees on a yearly basis. Freeholders could also require payment into a sinking fund, which is money that is set aside to cover any future major work that is needed for the property.
Finally, if a leasehold is being bought for an old property, this could cause problems if there is an intention to refurbish or alter the property. In order to make changes to the property, permission is needed from the freehold owner. More often than not, these changes come at a price, and not just the price of the alterations. The freehold owner could ask for a share in the increase of the value of the property, amongst other things.
For more information and legal advice visit Talk2Solicitors.co.uk to get expert advice from Property Solicitors.