The Risks Of Buying Leasehold – And Why Things May Be About To Change?
More than 4 million homeowners have properties which are owned on a leasehold basis, rather than Freehold.
Leasehold tenure normally applies to flats, where although the purchasers have bought the flat, the land it sits on is still technically owned by the Freeholder. Each flat is typically granted a lease of 99 or 125 years (the ‘lease term’).
A token ‘ground rent’ is payable (known as a ’peppercorn’ rent) and a service charge is normally be levied to pay for repairs and maintenance to the exterior and common areas.
England and Wales are the only countries in the world to retain this bizarrre feudal system which over many generations has enriched countless landowners. In recent years the leasehold system has been exploited by a number of major corporate housing developers who started selling their houses on a Leasehold basis. They then offloaded the Freeholds to offshore private equity investors who massively jacked up charges and made it virtually impossible for homeowners to acquire the Freehold of their house. Some developers also imposed nasty ‘doubling clauses’ that hiked ground rents so they swiftly multiplied to annual charges of many thousands of pounds, with some people trapped in homes they couldn’t sell.
The government finally reacted last year by banning the sale of new leasehold houses (but not flats), leaving many thousands of existing owners still trapped.
Meanwhile mortgage lenders tightened the rules so that any lease with less than 85 years remaining would in effect become ‘unmortgageable’.
So it’s good news that a report by the Law Commission has now recommended that the government takes steps to reform the unjust leasehold system.
The key proposals are:-
- Sell new flats on a fair ‘Commonhold’ basis, or fix new Leasehold terms at 990 years.
- Give existing Leaseholders a right to extend leases by 990 years.
- Scrap Ground Rents when leases are extended.
This article in The Guardian gives a very good assessment of what this is likely to mean in practice. However a cynic would point to the fact that there are a lot of vested interests who are doing very nicely from the existing system. So the worry is that the politicians in Westminster will make speeches promising action but ultimately do nothing…
Our next blog – coming soon …….
Help To Buy – what happens if house prices drop?
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