Could having a leasehold property become a more attractive option in 2022?
While operating as an estate agents in Birmingham, we have sold our fair share of leasehold properties. In this article, we will address some of the controversies surrounding these properties, as well as, what the UK government are doing to help solve them.
What is the difference between freehold and leasehold?
Before we attend to the real meat and potatoes of this article, I thought it would be useful to highlight the key distinctions between a freehold and leasehold property.
The building and land that the property stands on are owned outright by the buyer.
The buyer is responsible for any maintenance and repairs conducted on the property.
The buyer is able to make external changes to the property if they acquire planning permission.
The leaseholder doesn't own the building or the land that it stands on. This is owned by the freeholder who provides a lease to the property for a given period of time.
Leases can be as long as 999 years but if a lease expires, the property returns to the freeholder, even if the leaseholder has paid the entirety of the mortgage.
The freeholder is responsible for maintenance and repairs of the property. However, the cost of such is divided among the leaseholders. For example, if someone owns the freehold to a block of flats, the cost of repairing the roof will be divided among all the residents as part of a service charge.
The leaseholder isn't usually able to make external changes to the property and must follow rules set out by the lease. For instance, the freeholder may be against the installation of satellite dishes.
Why are leasehold agreements controversial?
Currently, if you are a leaseholder of a property with a short lease, generally any lease that falls below seventy years, and you wish to extend that lease, the freeholder of the property will have the opportunity to charge what is called marriage rights.
For example, if a leasehold property is worth £200,000 with a short lease, and will be worth £250,000 with an extended lease, the freeholder may charge the leaseholder fifty percent of that value increase if you decide to extend.
Another charge that you will incur as a leaseholder is known as ground rent. This is a payment made every year to the freeholder as rent for the ground that the property is situated on.
In some cases, the amount that a leaseholder is charged for ground rent can be so insignificant that you rarely notice the money leaving your bank account. You might have heard this being referred to as a peppercorn. However, some freeholders have been known to increase the ground rent to astronomical amounts, to the point that the leaseholder becomes trapped.
For instance, some freeholders may include a clause in the leasehold agreement that the ground rent will double after a given period of time. This could result in a very difficult situation where the leaseholder is struggling to afford the new ground rent but at the same time is unable to attract a new buyer. In fact, many mortgage lenders now refuse to lend on properties with such clauses.
How will new legislation help?
To counteract this, the UK government are introducing new legislation which will arrive in two parts. The first part will come into effect this year and will mean that if a leaseholder decides to extend their lease, their ground rent will become peppercorn, i.e. an insignificant amount.
The second part of the legislation doesn’t have an arrival date as of yet, but will increase the length of time that leaseholders are able to extend their leases by. At the moment, leaseholders are able to extend their lease on flats by ninety years at a time, and fifty years at a time for a house. However, once this new legislation is introduced, leaseholders will be able to extend their lease by up to nine hundred and ninety years. Consequently, yourself and many generations of your family to come will never have to concerns themselves with renewing the lease on the property.
Additionally, this new legislation will bring to an end marriage rights. This means that leaseholders will no longer have to compensate the freeholders for any increases in value to their property brought about as a result of the lease extension. This charge would normally be a very significant amount, and would be especially so if the property was located in Central London for example. Imagine renewing the lease on a flat in London, causing it’s value to rise from £800,000 to £1,100,000, and the freeholder charging you fifty percentage of the value increase, yikes!
What if I currently have a leasehold property and want to extend my lease now?
If as a leaseholder you have a short lease and wish to extend it, but don’t want to wait until the new legislation is introduced, you may be able to negotiate with your freeholder to avoid having to pay a large sum in the form of marriage rights. Once the new legislation is introduced, the freeholder won’t be able to charge anything for marriage rights which puts the leaseholder in a very advantageous position to be able to bargain with them.
Overall, it appears that the government are taking legal steps to make leasehold properties a more attractive option for potential leaseholders. With marriage rights being abolished, ground rents being reduced to a peppercorn, and leaseholders soon to be able to extend leases to nine hundred and ninety years, leaseholding could become a much more transparent and pleasant experience.
However, before making the decision to become a leaseholder, we strongly recommend seeking advice from the government Leasehold Advisory Service or a leasehold solicitor.
And if you require the sales, lettings or property management services from an estate agents in Birmingham, you can get in touch with Matthews Estate Agents through the contact details below or via our website. Tel: 0121 358 0008 (Lines open Mon - Fri 09:00 - 17:30)