Toxic Leasehold Contracts – how to avoid falling victim

Leasehold Contract

Buying a leasehold property means that you don’t own the land, but that you rent it from the freeholder for a long period of time (usually 125 years upwards). All of the restrictions and conditions are set out in the lease (hence ‘leasehold‘).

Toxic leasehold contracts have made the news recently for their large liabilities. Here, leaseholders are forced to pay out money for permission to make minor alterations and annual ground rent that doubles over short periods of time. Leaseholds have traditionally been used by developers building flats, but recently trends have taken a turn towards leasehold houses. The toxic leaseholds leave the property unsellable, as lenders and buyers are both wary of having to deal with an onerous and less desirable property. It also suggests that individuals may not have been adequately advised during the buying process, leading to knowledge gaps.

Prepare yourself by following these steps.

Before you buy a leasehold property:
  1. Ensure your solicitor takes you through these points in your lease, though this list should not be considered exhaustive:
    • All restrictions (noise, animals, alteration license requirements, subletting license requirements etc – do note not all these restrictions may be present)
    • Confirm your ground rent payments and review patterns. Advise whether they are considered onerous.
    • Length of the lease
    • Boundaries of the property, be clear on what is yours and what is not
    • Confirm your repairing obligations for the property
  2. Engage an independent solicitor. Be sure to look around for the best fit and try to use a different solicitor than the developer recommends, as there may be a conflict of interest.
If you already own a leasehold property:
  1. Make sure to extend your lease if it is approaching 80 years unexpired.
    • Once you have been the registered owner of your flat for two years, you have a statutory right to extend your lease by an additional 90 years and reduce the ground rent to zero, which would make it more attractive to potential purchasers.
    • If your lease drops below 80 years, costs can sky-rocket thereafter. So protect the value of your property. This lease extension calculator can give you approximate costs for extending a lease for a flat (from the Leasehold Advisory Service).
  2. Know your neighbours.
    • You can pursue collective action with your neighbours to get the best deals for lease extensions, service charges etc.

A recent committee report from MPs sitting on the Housing, Communities and Local Government Committee recommends that ground rents from existing leases should be capped at 0.1% of the value of the property and limited to £250 per year. For the average cost of a flat in the UK of £222,197, this would be a maximum ground rent of £222.197. For leases signed in the 80s and 90s, ground rents usually average around £150-£350; so it would seem the 0.1% rule could work and is a reasonable amount. New legislation is also in the works to prohibit developers from selling leasehold houses, and these properties would need to be sold on a freehold title. However this is not retrospective, so would only apply to future new build properties. There are also proposals to give ground rent a £0 value on future new build homes.

While these toxic leaseholds do unfortunately exist, it seems that the government is paying attention to the damage they cause and will potentially introduce legislation to counter in the future.

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