Leasehold Scandal and how to avoid them
The Leasehold Scandal, is a Buzz Word in the press right now, for a good reason!
Freeholders are charging way too much for leaseholders to buy their freeholds or extend the lease. Service charges being levied way too high. Cladding… the wrong sort making buildings a fire hazard, unmortgageable and in some cases unliveable resulting in £0 values.
As terrifying as this is, I still invest in them. Not because I like to live on the edge, but because there is excellent value in apartments in town centres (especially if they have a bit of outside space).
I also LOVE a lease. As a chartered surveyor, one of my specialities is lease advisory. Ask my clients, you give me a lease to read, I get over-excited. I can formulate a strategy without even needing to see the property.
Which again, is why leasehold floats my boat AND I know where the pitfalls are.
What to be aware of when buying a Leasehold
Here is how to NOT fall victim to a leasehold scandal
- When buying leasehold, you need to know how long is left on the lease, i.e. you want it to be more than 80 years. If it drops below this marriage value is payable on a lease extension which is expensive PLUS it gets even more expensive with every day that goes by.
- Freeholders know this (HINT: They may try and delay any lease extension deliberately). Look for leases that have more than 100 years left IDEALLY look for a 999-year lease.
- READ THE LEASE – Yes, I shouted it. You should read it yourself as well as your solicitor. Look for hidden costs. Admin fees for putting a tenancy in place. Fees for changing mortgage providers. Fees for redecorating.
- It all adds up. You can negotiate this out if it seems extreme, your solicitor SHOULD be able to advise when to do this. What will then happen is a deed of variation is attached to the lease which takes out onerous terms.
- Your ground rent should be no more than £250 per annum throughout the length of the lease. RPI increases or stepped rents are a no go. Anything more than £250 per annum or 0.1% of the value of the property and you will struggle to get a mortgage.
- Do make sure, if you are buying in a high-rise building/block that the building already has its EWS1 form AND that it is clear of the Grenfell Style Cladding… mortgage lenders require it.
- There can be long waits to get these forms which can slow down the purchase. So, before putting in an offer, make sure that the block already has the form.
- Make sure the lease does not have a clause that restricts who you sell to or the freeholder/head leaseholder has first right of refusal. Take that out using a deed of variation.
- New builds always come to the market overpriced. Do not pay that figure. Work out market value and pay that or less.
- Find out who you will have a lease with, either the freeholder or head leaseholder and then google them and look them up on Twitter. If there are bad reviews or they have done something ‘scandalous’ stay well clear in this market, they are too much trouble.
- They will get you caught up in lengthy Tribunal or serve you hefty service charge costs.
- Make sure you see previous service charge accounts before you buy. Preferably for the last 3 years so that you can see the average of how much it costs every month.
- Best case scenario is that there is a sinking fund in place which will cover cyclical maintenance works so that you do not find yourself with a hefty bill one year.
- Be prepared to join a leaseholder’s association or set one up. The only way to make sure that a building is managed well is if all leaseholders work together. Yes, it may require a bit of digging.
- However, having a yearly meeting with all leaseholders and putting together a plan of what you want gives you a stronger voice and stops any managing agent walking all over you. Yes, that will require a 2 hour every year commitment, but it is worth it for the clout it creates
- If you do not get all the information, your solicitor asks for from the management pack, walk away. You want to deal with freeholders and managing agents who are open, honest, and transparent (and preferably regulated by ARLA or the RICS).
That may seem like an extensive list of things to bear in mind. If you get that right, it will save you a massive headache in the future. It will also put you in the know and make sure you are buying a valuable asset.
Now here is the good part, as leasehold is becoming problematic, lenders are doing far more due diligence and rejecting lending on bad or overpriced leasehold. There is also less of an appetite for leasehold right now because of the bad press it is getting. Which means, investors have the upper hand.
Negotiate hard (20-30% below market comparable), read the lease to make sure there are no onerous terms, make sure the managing agent is regulated and communicative. You have got a reasonable length of time left on the lease. If you have got that you have got yourself a worthwhile investment.
Oh, and make sure you have got a good solicitor who understands leasehold!
Toxic Leasehold experiences for some owners
This is money recently reported as toxic leasehold case:
Taylor Wimpey and Countryside Properties are among the developers who have used leasehold deals on new-build estates for several years.
Both have now sold the leasehold contracts to investment companies.
But some have now been told by the investment firms it will cost them tens of thousands of pounds to buy it. ‘New agreement looks even worse’ Andrea Millward, 37, lives in a three-bedroom semi-detached leasehold house in Prescot, near Liverpool, with her husband, Roi, 31, and their two children, Fienna, eight, and Isaac, five.
The leasehold has an annual ground rent charge of £295, which doubles every ten years.
Andrea Millward with husband, Roi, and their two children, Fienna, eight, and Isaac, five in their three-bedroom semi-detached leasehold house in Prescot, near Liverpool The couple say they were told that, after living in the house for two years, they could buy the freehold at the cost of £2,950.
Louie Burns, of Leasehold Solutions, says: ‘These new deals could be leaseholders’ best option, mainly if their rent is about to double. ‘If they need to sell their home imminently, switching to RPI would make it more appealing to buyers.
The leasehold scandal was devised by developers to maximise profits.
When did these Leasehold scandals start?
The leasehold scandal first hit the UK headlines in 2017 when it was revealed that some developers had been selling leasehold residential properties with spiralling ground rents.
These leasehold properties had significant fees as part of the parcel when they were sold, which left many homeowners trapped in homes they could not sell and could not afford to live in.
With over 1.4 million leasehold homes in the UK, the ground rent/leasehold scandal forced the Government to act to reform leasehold legislation.
What to look for when buying a leasehold?
ANDREW Johnson, the money expert at the Money Advice Service, has some tips on what to consider before buying a leasehold.
Check how many years are left on the lease.
You may find it hard to get a mortgage on a leasehold property which has less than 80 years to run. A short lease will be a lot more expensive to extend.
Ask about the cost of extending your lease now if this might be an issue in the future.
You do not want anything that could affect your property’s saleability in the future.
Ask how much the ground rent is.
This may be a relatively small amount now but beware escalating ground rents which have seen extortionate figures payable at the end of the term of the lease. This may negatively impact your ability to sell your property in the future.
Ask about service charges and other related costs.
This generally covers things like or maintenance to the property, including building insurance. This can be several hundred or several thousand pounds, so you should consider how you will budget for these costs and the impact of any future increases.
“In the worst cases, people have been left trapped in unsellable and unmortgageable homes, needing permission or having to pay high fees for even minor cosmetic changes.” A leasehold is where a homeowner buys the right to live in the property for several years but does not actually own the land the property sits on.
There were 4.2million leasehold properties in England in 2015–16, of which two-thirds (2.9million) were flats, according to Government figures.
But the Committee is now calling for a shake-up of the rules.
It wants the Government to ditch ground rents on new properties and to legislate to cap ground rents on existing leases to 0.1 per cent of the value of the property, up to a maximum of £250 a year.
The Government is consulting on plans to scrap leasehold on new properties and to cap ground rents at £10 a year. But it says current development contracts means it cannot do this until at least 2021.
It adds that it is also working with the Law Commission to make buying the freehold of a home or extending a lease faster, fairer, and cheaper for existing homeowners.
Communities Secretary James Brokenshire MP said: “Since becoming Communities Secretary, I have repeatedly made clear my ambition to end those exploitative and unfair leasehold arrangements – rightly highlighted in today’s report – that have no place in a modern housing market.
“But we know there is more to do if we are to end the plight of unfair leasehold practices and will announce further steps shortly.”
Natasha Collins is a Chartered Surveyor, Property Investor and CEO of NC Real Estate, her firm of Surveyors which helps Landlords and Property Investors to build profitable property portfolios which align with their goals through strategic asset management. You can find out more about Natasha Here.
Date: 6th of November 2020
The British Landlords Association is a free national landlords association, join us for free now!