More than six million properties in England and Wales are leasehold and almost 40% of new-build homes sold in 2018 and 2019 were leasehold, according to the Leasehold Knowledge Partnership.
In June 2019, the Housing Minister announced that property developers would be banned from selling new-build houses as leasehold. The move came in response to a growing number of leaseholders protesting against being “trapped in their homes” due to high ground rent and service charges making their properties difficult, if not impossible, to sell.
The announcement is welcome news for future buyers of new houses, but what about the millions of existing leaseholders across the UK? Will the value of their homes be affected? Will selling a leasehold house become even more challenging? In this blog, we explain all.
What Is a Leasehold Property?
If you buy a leasehold property, you will only own it for a fixed period and you will have a legally-binding agreement with the “landlord” or “freeholder” — the person or business that owns the freehold for your property. This agreement will tell you how many years you will own the property.
If / when the lease comes to an end, the ownership of the property will return to the “landlord” or “freeholder” and you will no longer own your home (even if you have fully paid your mortgage).
The vast majority of flats are leaseholds, but in the 2000s it became increasingly common for new-build houses to sell as leasehold properties, which has ultimately led to the ban.
Can the Lease Be Extended? How Much Does Extending a Lease Cost?
The amount of time left on a lease can impact the house price. A property with a short lease may be more difficult to sell and is likely to achieve a lower sale price. There may be a smaller pool of potential buyers too, as many lenders will reject loan applications for properties with less than 70 years left on the lease.
Under the 1993 Leasehold Reform Act, leaseholders are legally entitled to extend their lease by 90 years if they meet certain qualifying criteria. Most leaseholders will be permitted to extend their lease if they have owned a long lease for two years or more.
The exact cost of extending your lease depends on how much of the lease remains and the value of your property. As the years remaining reduce, so does the value of the property, while the premium for extension increases.
The chart below shows the typical cost of extending your lease, depending on lease length. Be aware, the costs to extend your lease could be much higher — these figures are based on a flat valued at £200,000 with a 999-year lease.
To demonstrate how lease extension costs can spiral when lease length gets below 60 years, in May this year, a flat in one of London’s most expensive squares where flats typically sell for £7,000,000, sold for just £90,000 as it had just 14 months left on the lease. This lease will cost £900,000 to extend for only 20 years.
What Are the Leasehold Rule Changes for New-Builds?
The government’s changes will ban builders from selling new-build houses as leasehold in England (unless there are exceptional circumstances) and ground rents on flats could be cut to as low as zero.
All new-build houses will be sold as freehold properties to tackle unfair leasehold practices and prevent leaseholders from becoming “trapped”. There will also be a new time limit of 15 working days and a maximum fee of £200 for leaseholders from applying to buy their home. The Secretary of State has also stated that Help to Buy contracts will be renegotiated to rule out the selling of new leasehold houses.
The full details of the government’s plans, announced on 27 June 2019, can be read here.
What’s the Impact for Those Selling a Leasehold House, or for Those Considering Buying One?
In many cases, leasehold flats and houses are subject to ground rates and other clauses that incur additional costs. Some of these costs can increase either with the value of the property or at certain milestones. It is these spiralling cost increases — along with the increasing costs of lease renewal — that can render a property unsellable at market value because it can become virtually unmortgageable for any potential buyer.
For example, ground rents may start as £200 per year on the property, but double every 10 years. This would make annual ground rent £6,400 by year 50 of the lease.
In addition, clauses can include a mortgage fee if the lessee decides to remortgage at any point. This fee could be 0.05% of the home’s value, for example, or a £150 charge for remortgaging a house valued at £300,000. Other mainstay charges could even include a fee (usually around £50 plus VAT) if the property owner wants a pet.
The key for leasehold homeowners is to buy the freehold (if possible) or keep your lease length above 100 years. Keeping the lease long will keep lease extension costs relatively low and mean potential buyers can acquire a mortgage for the property should you decide to sell.
If you’re buying a new build house, the leasehold should no longer be a problem following the ban. If you are considering purchasing an existing leasehold house, be sure to check the length of the lease, research renewal costs and research the possibility of buying the freehold.
A testament to the importance of this is a real case study from TheToysAreALIVEITellThee on Mumsnet:
“Bought our first and current home seven years ago. Was told by the solicitor that it was Leasehold with 63 years left but not informed what the implications of this were, just that it could mean we’d have a problem if we wanted to sell in the near future and she would advise that we either extend the lease or purchase the freehold when we can – great. I was young, excited that our offer had been accepted and we’d be moving into our dream home and trusted that the solicitor knew their job.
“Fast forward seven years and 2 DC later and finally… [I] start looking into buying the freehold.
“I feel sick, have read that it can cost tens of thousands of pounds, extending the lease can be just as costly, and if we just let the lease run out the land reverts back to the leaseholder and we can be forced to then pay them RENT for our own home that would have been fully paid off.”
Under the new regulations, where buyers are incorrectly sold a leasehold home, they can obtain the freehold outright at no extra cost.
If your lease has become expensive to renew or if you’re struggling to sell your property because of unexpected lease costs, get in touch with one of our team. We’re cash buyers and in a position to purchase any leasehold property — regardless of the lease term remaining.
You could sell your home in as little as seven days. If you need a swift sale, why not visit our homepage and enter your postcode for an instant cash offer on your home.