In the past few weeks concerns have been raised about three aspects of leasehold properties and these were highlighted in Victoria Derbyshire's programme on 2nd February 2017 (http://www.bbc.co.uk/news/business-38827661)
The issues were:-
- How much it can cost to buy the freehold interest in your leasehold house;
- How much ground rent you will have to pay in the future;
- How to deal with excessive service charges.
The other point you need to think about is what protection you may have if you fail to pay your ground rent.
The terminology that is used here can often confuse people so please remember that the freeholder owns the whole of the property and the land on which the property is built whereas a leaseholder will own an interest in the whole or part of the property and that interest will be time limited.
How much it can cost to buy the freehold interest in your leasehold house?
Until relatively recently it was unusual to see leasehold houses although they do exist. There are some long leasehold houses on Judges Walk in Norwich and these long leasehold properties were built on land that was owned by the church and were the periods of around 999 years.
Legislation was enacted which allowed the owners of long leasehold houses to acquire the freehold interest in the property subject to payment of a premium to the freeholder. The relevant legislation set out a procedure that was to be followed and also provided guidelines on the premium that was to be paid. The leaseholder would also be liable to pay the freeholder's legal costs and surveyors fees.
In the recent years, large developers have stopped selling the freehold interest in houses but have granted long leases of them. They have then sold the freehold interest in the properties to investment companies such as pension funds, who have then quoted what the homeowners regard as being unreasonable sums for the acquisition of the freehold interest in the home. When the freeholder has been challenged about the sum that they have requested, it would appear that the response has been one stating that the costs would be higher if the statutory procedure was followed.
If you are intending to buy a property on a development site, please make sure that you know exactly what interest you are buying and fully understand the implications of doing so.
How much ground rent you will have to pay in the future
If you own a leasehold property the lease will make provision for the payment of a ground rent. This is usually a sum of money that is payable to the landlord on a quarterly, half yearly or annual basis. Ground rents can range from a peppercorn, through a dozen red roses on Valentine's Day or actually be a monetary sum. Ground rents can be fixed at a certain sum for the whole of the term of the lease or can make provision for increases by reference to the retail prices index, doubling every 10 years or by reference to some other formula.
The recent case that was highlighted in the Victoria Derbyshire programme was of a gentleman called Luke Mosson who bought a property where the rent was stated to be £250 until the first rent review. The rent was reviewed a few months after Luke bought the property and the reviewed figure suggested that a rent of £8000 per annum would be paid. The formula set out in the lease was a somewhat unusual one and Luke's solicitor made a payment to the landlord of £7000 in order to have the clause redrafted. This meant that the new clause that was inserted stated that the rent was to be doubled every 10 years. By 2020 the rent would be £2000 per annum and the rent at the end of the term, using this doubling provision, was going to be in excess of £60,000. As was pointed out in the programme a rent which doubles every 10 years can result in a return of 7% per annum.
We have also seen ground rent reviews which are carried out by reference to the retail prices index. In periods of high inflation this can result in a substantial increase in the ground rent payable and, even in periods of low inflation the rent increases over a number of years can seem to be extremely high.
Once again if you intend to buy a leasehold property you should ask your conveyancer to make sure that they understand the rent increase provisions and that they explain these to you clearly.
How to deal with excessive service charges
The other point bear in mind is that if you own a leasehold property, the lease may well make provision for you to contribute to the cost of repair of communal parts, insurance of those parts and other such provisions. There have been, and continue to be, cases where the leaseholders believe that the freeholder is attempting to levy unreasonable costs for the maintenance of such areas.
One recent case appears to highlight a situation where charges of £700 per annum were being made for the maintenance of a tree and a few bushes on a small area of land. When you buy a property your conveyancer will advise you of the anticipated service charges but whilst these may appear to be reasonable when you buy the property, this may change in the future. Legislation makes certain provisions available to leaseholders and you should consult with your conveyancer if you have any concerns. The ultimate right available to leaseholders is to acquire the freehold interest in the property from the freeholder. There are all will obviously cost implications associated with this but this will give the leaseholders control over their futures.
What protection you (and your lender) have if you fail to pay your ground rent?
If you fail to pay your ground rent the freeholder will normally have to go to court to get an order to remove you from the premises. As part of those proceedings your landlord will also have to give your lender notice of the proceedings. Finally, the courts will have the discretion to make such orders they think are appropriate and they can grant what is called '"relief from forfeiture."
However, if it can be shown that the lease is one which falls within the Housing Act 1988, your lender does not have to be notified and the courts do not have the ability to grant " relief against forfeiture."
Ironically enough, a lease will fall within the provisions of the Housing Act 1988 if:-
- the leaseholders are individuals;
- the leaseholders occupy the property as their only or principal home: and
- the ground rent is more than £250 outside of London and more than £1000 inside Greater London.
If your lease has a provision stating that the rent will increase, either by way of doubling or by way of reference to the Retail Prices Index then you may end up in the situation where your lease is treated as an assured shorthold tenancy and, as a result, the courts will have no discretion as to whether or not to allow the Landlord to evict you should your rent be unpaid for more than three months. It is highly likely that if your lender was aware of the fact that you had not paid your ground rent, your lender would pay it and then recover the ground rent from you.
Please note that this does not apply to leasehold houses.
Conclusion
Owners of Leasehold properties should always be of the sums that they will have to pay to their Freeholder to:-
- Buy the freehold interest in a leasehold house;
- As ground rent; and
- By way of service charges.
They should also make sure that they pay any sums that are due as soon as they are due in order to avoid court proceedings being taken against them for forfeiture.
For further help with any Leasehold properties, or to buy and sell your property, our dedicated Property Solicitors are on hand to help. Contact us today on
