In England and Wales properties are mainly split into freehold and leasehold. A freehold property is owned outright and not limited to a set number of years. A leasehold property is subject to a lease and managed by a freeholder or a management company appointed on the freeholder’s behalf. The key features being the length of ownership set for a number of years and the leaseholder being obligated to comply with the terms of the lease which frequently includes payment of ground rent and insurance rent to the freeholder and payment of a service charge for the provision of communal facilities.
Whilst only 20% of all properties in England and Wales are leasehold, this is a growing sector as 46% of properties in new build developments are likely to be sold as leasehold. This is not only in relation to flats but houses are often sold as leasehold with the freehold title being retained by the developer and sometimes sold to an investment company in order to obtain additional profit. This issue has been in the news over the last year with coverage featuring in the political manifestos of the main parties and even in the Queen’s speech.
Historically ground rent has been a nominal figure (often called a “peppercorn” rent) or a fairly low sum paid to the freeholder on an annual basis. However, the amount of ground rent has now escalated to an average of between £300 and £1500 per year and can include lease clauses requiring the ground rent to be periodically increased so whilst the ground rent can start off in the hundreds, after 20 or 30 years it will most likely be in the thousands.
Mortgage lenders’ guidance is that lease terms should only be accepted if the increase is fixed or can be readily established and the amount is reasonable. Some lenders impose a requirement that the ground rent will not be increased any sooner than every 25 years. The effect of this is that not all lenders are willing to lend on leasehold property.
The government published a paper in December 2017 entitled Tackling Unfair Practices in the Leasehold Market which describes the system as feudal and unjustified. The Secretary of State for Communities, James Brokenshire stated “unfair ground rents can turn a homeowners dream into a nightmare by hitting them in the back pocket and making their property harder to sell”.
A government consultation into leasehold reform has been underway and we expect to see a report published in Spring 2019 followed by new legislation as early as 2020. The consensus is that legislation will be introduced to significantly reduce the number of new build houses being sold as freehold and new leaseholds will only be created where essential, such as with shared ownership schemes. In addition the government propose to cap ground rent to a nominal sum of £10 per year for all new leasehold property. Although the tide is turning on the leasehold property market, these proposals will not have any impact on existing leasehold property.
We recommend that you instruct an expert conveyancing solicitor to advise you thoroughly with your leasehold property purchase. As part of our service we will:
- Provide you with a full copy of the lease.
- Obtain the seller’s replies to a Leasehold Information Form including copies of ground rent receipts, service charge accounts and insurance details.
- Obtain contact details for the landlord and management company.
- Advise you on what further information is needed from the landlord or management company.
If you need advice from a solicitor, contact our conveyancing team on 01325 281111 (Darlington) or 01748 830000 (Catterick).