Anushka Nicholas looks at the key things to look out for when buying a leasehold property.
What is a leasehold interest in land?
If you buy a leasehold property, as the leaseholder you will own and be able to enjoy use of the land, but only for a specific period of time; i.e. 99 years, 125 years or 999 years. Once the lease term comes to an end, you are required to return the land to the landlord. You pay a premium/price to the landlord upon the grant of the lease, and most leases further reserve an annual ground rent. There will be an additional obligation to pay service charge and the lease will contain covenants relating to use and enjoyment of the premises. Lease agreements differ and you should read your lease carefully to ensure you are not breaching any terms. When buying a leasehold property ensure that you ask your legal advisor to provide a report on the terms of the lease.
Do you need to keep paying escalating ground rents?
If the lease term provides for an escalating ground rent you will be bound to pay this to the landlord. Ground rent and ground rent review provisions should be carefully checked in a lease, as steep periodic increases in ground rent (in some extreme cases doubling every 10 years), could make the flat unmarketable or even un-mortgageable in the future.
Is there anything you can do to move off a leasehold agreement?
A lease once granted will carry on for the entirety of the lease term, unless the lease is surrendered by the leaseholder to the landlord. If you extend your lease via the statutory process (under the Leasehold Reform, Housing and Urban Development Act 1993 which applies to flats), the ground rent reverts to a peppercorn; i.e. you pay no ground rent going forward. However, the statutory calculation of premium for a lease extension requires the Landlord to be compensated for the loss of ground rent, and the price you pay the landlord for a lease extension will reflect this element of compensation.
A group of leaseholders (who meet the statutory criteria) can apply to the Landlord to purchase the freehold of the building by making a collective enfranchisement application.
If you own a leasehold house, the Leasehold Reform Act 1967 gives leaseholders a statutory right to purchase the freehold of their leasehold house. If you purchase the freehold you will not have to pay ground rent going forward.
What are your options if your lease has been sold to a third party?
If the landlord plans to sell the freehold of the building which houses your leasehold flat, the landlord (subject to some exceptions) has to serve a statutory notice on the leaseholders giving them a ‘right of first refusal’ in respect of purchasing the freehold. A landlord who does not comply with the statute is guilty of a criminal offence, and the leaseholders can apply to court to have a transfer to a third party purchaser set aside on the basis that they were not first served with a notice of ‘right of first refusal.
Will the upcoming government review solve problems?
The government has announced that they are planning on introducing new measures aimed to cut out unfair and abusive practices within the leasehold system, including a ban on leaseholds for almost all new build houses. They have promised changes so that ground rents on new long leases of houses are set at zero, and to introduce measures to make it cheaper and easier for leaseholders to buy out their freehold.
It is left to be seen what changes will actually be implemented to statute, but these measures if brought into force would certainly improve the current situation for many leaseholders.
Any other advice for homeowners in this situation?
Seek legal advice regarding your rights as a leaseholder, so that you are aware of what you can and cannot do under the terms of your lease. You may be eligible to extend your lease under statute or collectively purchase the freehold of your building with the other leaseholders or make an application for the ‘right to manage’, or purchase the freehold if you own a leasehold house.
Anushka Nicholas, Associate Solicitor in the Commercial Property Department at Blacks Solicitors LLP
