It’s a favourite past time for many of us – looking through Zoopla at properties we hope to one day buy, but millennials know it’s an ever increasing pipe dream, even with schemes like Help to Buy. Putting aside the depression and sense of helplessness that this past time is perfect at creating, the one thing that you notice is that almost all the properties that you might just one day be able to buy are leasehold rather than freehold. On the face of it this doesn’t matter, you’re forking out the same amount of money for that 1 bed leasehold flat as you are for a 1 bed freehold flat in the same area, so clearly it doesn’t make your property any less valuable or anymore costly, right? Oh, if only that were true.
You see, if you manage to scrape enough together to leave the rental market and own your own property, the chances are, in London, you’ll be buying a leasehold flat in a new development with the help of the Help to Buy scheme as your first step on the housing ladder.
Nine out of ten new build properties in London are leasehold and most first time buyers plump for new builds as they tend to attract the most governmental support for buyers through the likes of Help to Buy. In fact Help to Buy has allowed for a huge expanse on leasehold developments across the country, with 69% of houses sold in the Northwest in 2016 being leasehold.
Leaseholds have their roots back in the feudal system introduced by William the Conquerer in 1067. William took all the lands of England as his own and, to keep the support of his nobles, handed out parcels of it to them. The nobles then set about splitting up parts of their land into smaller parcels that they offered as leases for agrarian purposes. This gave farmers the long term use of strips of land, and certainty, for them to make a settled living from, and the land owner a steady income. This form of perpetual land ownership along with standard freeholds was central to the development of property rights, the development of the merchant and then middle classes, and with it democracy and the sovereignty of Parliament. But as ever with such old legal arrangements that worked well for so long, reform has been little, meaning it’s no longer fit for the modern age, the way we now live and urbanisation.
In some ways, as a leaseholder you’re a glorified tenant, with a hefty mortgage to go along with it. All that cool £450,000 you splashed out on that one bed new build leasehold flat gets you is the right to occupy the space for the length of time on the lease. Yes, usually this will be 99 or 125 years, or for up to even 999 years if you’re lucky, and you can sell the lease on. But you will likely have to pay a ground rent to the freehold owner and this, depending on the terms of the lease, could be raised arbitrarily after a certain point, and is pure profit for said freeholder. Then there’s the service charge, possibly contributions to reserve funds, and building insurance. Combined they can run into thousands of pounds a year, all on top of your mortgage repayments.
The freehold owner via the management company can put any expenses relating to your block of flats, within reason, on your service charge, and when work is being chosen, they don’t have to choose the cheapest quote. And while they’re not meant to, unscrupulous freeholders have been known to appoint any contractor they want to do any job, even if it’s unnecessary, provided they can justify it as ‘reasonable’. While you have the right to get a breakdown of the service charge (and challenge it in a tribunal if you think its excessive for the quality of service received), you only have to be consulted on the cost of a contract for certain services (window cleaning, gardening, lift maintenance etc) if the cost to any one leaseholder would be more than £100pa and the contract is for longer than 12months, which is rare for such a contract. However, you must be consulted about works to repair, maintain or improve the building if the costs involved would exceed £250.
This may leave a leaseholder in a potentially precarious position financially, especially if they’re a first time buyer whose scrimped and saved and used up all their financial flexibility to buy the lease, as many leaseholders are.
But what about the re-sale value of your lease; you have that as an asset surely? Well that really depends on what term is left on the lease. A decent 3 figure years lease isn’t so much an issue to sell on; they tend to be long enough even if you were buying it as a family home, with an eye to it as an asset that your kids can inherit. But many of the new builds that first time buyers are headed for have leases of 99years. After the lease drops bellow 70 or 80years it could be hard to get a mortgage as the property is seen as a depreciating asset, making it hard to sell on. Once the lease has been running for 10years, owners may find it difficult to sell as people will have an eye on that 80year mark coming up quickly, thus reducing the pool of willing buyers. This could be the next big housing issue that could see the market collapse as everyone with such leases find their property has become a negative asset and can’t afford to sell and move up the ladder.
Of course you can enter into discussions with your freeholder to extend the length of the lease so you can sell on again, but this will cost you. I recently inherited some money, and with my sister bought a flat in Greenwich, where this was the case. The lease was becoming too short which would impact the resale value we’d achieve, but as part of works the freehold owners were doing, they agreed to extend all the leases to about 150years, and they offered all the lessees a choice from two payment options for making the extension: a higher lump sum payment but then no more ground rent ever, or a smaller lump payment and a reduced annual ground rent. We were able to agree with the vendor that he paid the one off larger payment option, so no ground rent is now payable. Furthermore, our vendor paid the legal fees required by the freeholder to extend the lease, so none of this came at our expense. It was simply what the owner had to do if he wanted to sell at a decent value that would enable him to pay off the remainder of any mortgage and buy that next property.
So what can be done when faced with such leases as these? Well lessees could try and collectively buy their building’s freehold and turn it into a Commonhold or Share of Freehold. Property developers often sell on the freeholds to the leasehold properties they develop, and at an affordable rate. The problem is that it can be hard to get hold of your freehold direct from the property developer. They tend to sell the freeholds on after development as a secondary revenue stream, often to investment vehicles and companies, because from an investment point of view, apart from a few legal responsibilities, these freeholds basically print money. These investors may be willing to sell you the freehold, but it is likely to be at a far higher price than they paid for it.
There are alternatives. You can look for properties with Commonhold tenures. These came in in 2000, and are where you own your flat outright and flat owners come together in associations to manage their building, choose managing agents and set the service charges. It was hopped these would replace leases but there are only 15 such flat developments in the UK and only 1 in London. Alternatively look for flats (like mine) with a ‘share of freehold’. In these cases your flat is on a lease (in my case it had 912 years on it when purchased), but each lessee owns an equal share of the company that owns the freehold and the building is run as a co-operative by the lessees. When you sell your flat the buyer also gets the share of the freehold. Just as with Commonhold, the owners hire the managing agent and set the service charge. Sadly though, these properties don’t offer the lucrative opportunities that straight leasehold properties offer developers, so there are few of them being created. Many, like mine, date from the early 1990s, so the chances of your being able to find one as a first time buyer, whether using the help to buy scheme or not, are almost nil.
This just leaves you with the hope that Parliament changes the law. It’s certainly on the radar, with many MPs pushing for reform, and the Law Commission has been commissioned to do a report into the situation and suggest changes. But sadly, despite the leasehold system being called ’flawed to its roots’ twenty years ago by government, leases are still going strong, with the current government and councils backing more and more of them as they race to solve the crisis of a lack of housing. The minister for housing and homelessness recently argued that leases make home owning more straight forward, especially in multi residence buildings. This was quickly derided and proved not the case. Thankfully there are a number of organisations, such as the Leasehold Knowledge Partnership and the ground roots group National Leasehold Campaign, which are campaigning hard and offer support to those who need it. But a change in the law can’t come soon enough, both for those trapped by their leases, and for the health of the wider housing market and economy.