Any leaseholder who has ever been caught up in a complex or frustrating dispute with their freeholder will have allowed themselves a smile of satisfaction when Sajid Javid announced a clampdown on exploitative leases. The communities secretary was responding to the plight of more than 100,000 buyers of new-build homes locked into leases with spiralling ground rents; one politician has labelled the scandal as “the PPI of the housebuilding industry”. If you’re buying a new or second-hand property with a lease, there are several important steps you should take to ensure you don’t get caught out.
LEASEHOLD VERSUS FREEHOLD – THAT’S THE DIFFERENCE?
If you buy a leasehold property, you own your dwelling, but the freeholder (or landlord) owns the ground beneath it. Leases are common in communal properties such as flats or maisonettes, where a central body is required to arrange buildings insurance or carry out maintenance work. Leases of this kind will continue, albeit with a “peppercorn” ground rent. However, new government rules, which could be in place by the end of the autumn, will ban developers from selling new houses with leases, which, critics say, is essentially forcing a homeowner to pay an undefined charge for no obvious reason.
HOW LONG SHOULD A LEASE BE?
When buying a leasehold property check how long is left on the lease. Most are 125 years when they are drawn up. However, once a lease drops below 80 years, the value of the property plummets and extending the lease can be costly. You should request a copy of the lease from your estate agent or developer as soon as you become interested in a property, rather than at exchange of contracts. Leases can be long and contain complex legal language, so look at it as soon as possible.
DON’T USE SOLICITORS PROVIDED ON NEW-BUILD DEVELOPERS “APPROVED” LISTS
Alleged solicitor negligence has been central to the leasehold scandal. The lesson is to use your own solicitor, rather than one recommended by the developer, even if it costs more. An independent solicitor will look at the lease with fresh eyes and could stop a disastrous purchase. In the light of the leasehold scandal, some solicitors could face disciplinary action from the Solicitors Regulation Authority.
WHAT YOU SHOULD EXPECT TO PAY
Check the small print of a lease carefully for hidden costs. You should expect to pay a service charge, buildings insurance, and an annual ground rent that is reasonable and rises, at most, in line with the retail price index. Keep an eye out for clauses (now mostly abolished) where the ground rent doubles arbitrarily every few years. It could make your home impossible to sell or remortgage. On older properties, ground rent should be relatively low, £50 to £100, according to Which?, the consumer group. When your lease is at its maximum term, your ground rent should be at its smallest.
IS THERE A “RESERVE” FUND”?
This will be a contribution you will be required to make towards a contingency fund that is used for large-scale maintenance and works. The amount depends on the age and size of a property. Ask whether large-scale works are planned in the next two years, how expensive they will be, and whether they will interrupt your use and enjoyment of the building.
CAN I EXTEND MY LEASE?
You have the legal right to extend your lease, but the cost can vary and the rules are opaque. You’ll have to pay solicitor’s fees, the freeholder’s “reasonable costs” and a deposit (either £250 or 10 per cent of the cost of the new lease, whichever is greater). Extending a lease is a bureaucratic and time-consuming process lasting more than six months. You can negotiate a price informally with a freeholder, but they may take advantage by charging too much. If time allows get your own valuation, serve notice on your freeholder and then, if a reasonable deal is not struck, take them to a tribunal. In some cases it is cheaper to buy the lease rather than extend. See lease-advice.org.