When a buyer purchases a freehold property, they own the property outright, including the land it lies on. The purchaser of the freehold property is responsible for maintaining the property and the land.
With a leasehold property, a purchaser enters into a lease of the property with the freeholder for a defined period of time. In respect of leasehold houses, the term is usually between 250 and 999 years. In theory, when the lease ends, ownership returns to the freeholder. However, in reality this rarely happens as leaseholders have legal rights to extend their lease term or to purchase their freehold.
As a purchaser of a leasehold house, it is prudent to consider the length of the lease and the amount of ground rent due before making an offer, to ascertain whether there will be any problems obtaining mortgage finance or selling the property in future.
Leasehold houses are fairly common in some areas across England and Wales and are not generally a cause for concern to mortgage lenders. However, there is a growing issue as some housing developers are selling houses as leasehold, with a “reassuring” 999 year lease. This is not in itself a problem; however, these leases have a ground rent that is much higher than previously experienced and can easily start at £295 per annum, set to double every 10 years. This may not seem like an issue at first however when calculations are made it becomes apparent that after 30 years the ground rent would be an astonishing £2,360 per annum. If the owner failed to meet these payments, their house could be seized with no compensation.
The table below indicates the increase in ground rent over a 100 year period, if the ground rent was to start at £295 per annum, set to double every 10 years.
- Year 1: £295.00
- Year 10: £590.00
- Year 20: £1,180.00
- Year 30: £2,360.00
- Year 40: £4,720.00
- Year 50: £9,440.00
- Year 60: £18,880.00
- Year 70: £37,760.00
- Year 80: £75,520.00
- Year 90: 151,040.00
- Year 100: £302,080.00
Lawyers are now warning off some purchasers. There have been examples on some estates where ground rents will rise to almost £10,000 a year by 2060.
In 2015, figures from property firm, Savills, stated that over the previous five years, investors had piled £1.2 billion into residential properties which have a ground rent.
Property developers selling houses under a lease cannot only make a profit from selling the property, but also the freehold. This is usually sold on to an investment company.
Similarly, the money from these ground rents is viewed as a steady stream of income at a time when interest rates are low. The investment company can then resell the freehold to another buyer.
The Leasehold Reform Act 1967, allows owners of leasehold properties to extend their lease term or purchase their freehold, subject to a valuation and certain conditions. In respect of the leases mentioned above with a very high ground rent, it could cost the owners a large amount of money to purchase their freehold as the high ground rent inflates the valuation of the freehold. Costs could run into the thousands. A good and reputable lawyer will be able to check the lease for you and advise you straight away if the property does appear to be subject to an unusually high ground rent and, therefore, may affect the saleability of the property.
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