The complexities and myths of leasehold flats

Posted on: April 20th, 2019

Leasehold property, or at least its first incarnation, dates back to Medieval times when feudal law ruled England, and property meant power. This meant that landowners wanted to retain control of land and earn as much from the land as possible. The land owned by the ‘freeholders’ would be worked by the ‘serfs’, who were provided with shelter and would work the land for a fixed period of time.

The concept of leasehold started to change in the 1920s when legislation was brought in to protect tenants and the ‘freeholders’ started to sell off the land or properties as long leases, while retaining an interest in the property.

After the 1950s, with our exploding towns and cities, there were many more leasehold properties, as blocks of flats were built and houses sub-divided into leasehold properties. Changes in legislation since then have given more protection and power to the tenant, but is it enough?

Leasehold properties make sense when you have multiple owners sharing an infrastructure in which their own actions effect owners of other flats. However, whilst there are many sensible landlords out there, it appears that there is currently a market for greed amongst some landlords and managing agents. This, coupled with antiquated laws and a lack of understanding of leasehold, means there are many pitfalls for the tenants.

Ground rents

One of the major issues is ground rent payments. As landlords look at leasehold properties as a way to make money, ground rents are rising exponentially, and many which we come across today are at the rate of £250.00 or more per annum. Some lenders are hesitant to lend on properties with this level of ground rent, so not only does this delay transactions in a purchase (as the costs need to be reported to lenders), but it can also become an issue as to whether the lease becomes an assured shorthold tenancy. This would have adverse effects on the rights of the tenants, and potentially the lenders, who have security. The intention of a long lease is not to be an assured shorthold tenancy, so it needs to be considered whether more should be done for these tenancies to only become assured shorthold tenancies for short term leases.

A further issue with ground rents is the escalating clauses which are difficult to read and interpret. They can also mean hideously engorged rents, which can affect the value and marketability of a property, not to mention the tenant’s pockets!

Delays in the process

One of the main benefits in leasehold for large blocks of flats is the obligation on the landlord to insure the buildings. However, in the changing world of risks and the requirements of lenders, most leases are not fit for purpose with regards to the insurance provisions. This, again, is a timely and costly delay in transactions to ensure deeds of variations are entered into.

Further, the conveyancing process for the selling and purchasing of leasehold properties can be exceptionally longwinded. The administrative costs for paperwork the existing tenant is entitled to, is out of proportion for the work involved, and the time delays and hoops one must jump through are tremendous. There are often numerous conversations between conveyancers and management companies as well as their agents, freeholders and their own agents, which create delays, unnecessary fees and uncertainty as to whom should deal with certificates of compliance, as well as the notices and fees.

The general consensus from various industry leaders is that there should be a streamlined procedure in which sellers should be encouraged to obtain the management packs at marketing stage, so that the buyer understands what they are buying at the beginning of any transaction, and this information should be set out in a prescribed formula which is easy to read.

On completion of matters, and in particular where there is a Land Registry restriction confirming that consent should be granted by the landlord or management company to the registration of the new buyer, there can be numerous delays in obtaining the proper consents.

There are also increasing legal fees for buyers who have to deal with chasing certificates and giving explanations to lenders as to why their charges haven’t been registered. This, along with delays in registrations, would theoretically be minimised if there were more onerous terms put onto landlords (and their agents), and if there was redress available to buyers who complied with their own obligations.

When considering whether to purchase a leasehold property, one should consider the time it takes to purchase the property and the additional fees payable. The total expenditure over the term of your ownership should factor into any decision to be made, and it is integral that expert advice is sought to explain the terms of the lease and your obligations under the lease.

For more information on leasehold purchases, please contact our Residential Property team.