19 January 2022

The hidden costs of leasehold property

By Debbie Pearce, Chartered Legal Executive, Hayes + Storr.

You may have seen recent media reports on the so-called leasehold scandal. First, escalating ground rents, which increase exponentially after periodic reviews. Then, the cladding crisis, which has spotlighted the costs landlords can pass on through service charges. So, if you are buying a new home, should you avoid leasehold properties?

There are more issues with a leasehold than a freehold property, however, this does not mean you should discount a leasehold property. While there are extra things to consider, a good solicitor will help mitigate the risks and there are also government reforms in the pipeline, which may increase protection.

Providing you have addressed any outstanding issues on your leasehold property, it’s value will increase (or decrease) in-line with all the usual factors that influence the housing market. Here we look at some of the issues and additional costs which can arise with a leasehold property.

Ground rents

As a leaseholder, you will almost certainly have to pay ground rent. Ground rent can increase exponentially over the period of the Lease. The Ground Rent formula detailed in the Lease may be difficult to understand making it impossible to calculate how much the rent will increase over the term of the Lease or may double every five or ten years. For example, an initial ground rent of £200 which doubles every five years will be £6,400 by year 25. This creates an ongoing financial burden and makes it hard to sell or remortgage. Some Mortgage lenders will refuse to lend on properties which the rent increases exponentially.

There is legislation which is currently being discussed which would mean any new ground rent can only be for a token amount. However, this is not yet law and is subject to approval and may change. If this Legislation is passed, this is good news if you are buying a new build or a conversion. However, it will not affect existing leases and it is still important to check the lease terms very carefully. Inexperienced conveyancers, or those relying solely on standard procedures, can easily overlook the detail of ground rent provisions. So, choose one familiar with leases and who can give your purchase their individual attention.

Cladding, who will pay?

Following the Grenfell Tower fire tragedy, attention has focused on the safety of multi-storey blocks and the need to replace inflammable cladding. Although the Government is introducing legislation to improve safety, this is unlikely to resolve completely who should pay to bring a defective building up to standard.

In some cases, the lease may permit the landlord to recover this cost through the service charge. This may result in affected leaseholders facing an average additional cost of £9,000 per flat. In the worst cases, the figure could be much higher.

Your survey should reveal any problems with cladding. Some properties, although affected, may have a satisfactory remediation plan in place, with the landlord paying for the works or the cost discounted in the price. Your solicitor will clarify these matters. You can then make an informed decision on how to proceed.

Wider issues with service charges

Problems with cladding have also highlighted wider issues with service charges. Well-drafted, these provisions should ensure all leaseholders in a building contribute to the cost of maintaining shared facilities. They should set out clearly which services the landlord must provide, and the mechanism for funding and delivery should be fair and reasonable.

Some leaseholders feel they do not have enough say over the services they receive and are unhappy with cost and quality. There is already some legal protection in place for leasehold owners, who have the right to challenge unreasonable costs. However, in practice, this can prove a time-consuming and expensive exercise, especially if it becomes necessary to repeat it.

Conversely, in many leasehold developments the service charge provisions work well. For example, leaseholders may take an active role in management through a company they control. When viewing a leasehold property, ask about the management of common parts and service charges. It is easier to avoid buying into potential problems than to have to resort to your legal rights to sort them out later. Your solicitor should investigate any potential service charge disputes as part of their pre-contract enquiries, so you should not be caught out.

Indeed, as your solicitor, we would look carefully at how the service charge provisions work overall. As well as clarifying the amounts, we would check the seller’s payments are up to date and correctly apportioned on completion.

Ideally, the service charge should spread the costs evenly over time, so all leaseholders contribute. Under-provision in the past could mean disproportionately large increases later. For example, replacing a capital item, such as a roof or service lift, can be expensive.

The landlord should have apportioned the cost over the item’s lifetime and collected this through the service charge on a rolling basis from all the flat owners, past and present, who have benefitted. This is known as a reserve fund. However, not all Landlords keep a reserve fund and this is something you should ensure is checked by your Solicitor. However, if there are insufficient reserves, then you and the other current owners may have to make up any shortfall or pay for the replacement. So, we would also ask about planned expenditure and the building’s maintenance. You could then form a more accurate view of the likely costs in the future.

The cost of getting consents

Freeholders can use their homes freely, subject only to planning and other laws. In contrast, as a leaseholder, you will be more restricted, and you may need to apply for your landlord’s consent for certain things. The cost of these could be higher than you expect, and the process can be time consuming, so find out any limitations on the property beforehand.

Management Packs/Management Fees

When offering to purchase a Leasehold Property, you should be aware that there are fees payable to the Management Company or companies for both buying and selling the Leasehold property. Some Leasehold Properties will have two Management Companies, one which deals with the Ground Rent and one dealing with the Service Charges. When selling a property, you will have to pay the Management Companies’ Fees to obtain the Management Packs and these can run into several hundreds of pounds for both Management Packs.

When purchasing a Leasehold property, fees are payable to the Management Companies to deal with Notice of Assignments and Deeds of Covenants and, again the costs of this can run into several hundreds of pounds.

Reforms and the future of leasehold

Historically, leasehold has provided an effective way of ensuring obligations are mutually enforceable and is better suited for flats than houses. In recent years, problems have increased with some developers prioritising the creation of income streams over homeowners’ interests. As a result, the Government has embarked on a major programme of reform, aimed at readdressing the balance.

This includes making it easier for leaseholders to extend their lease, to acquire the freehold, or to buy out their ground rent. The extent and timing of any changes is still uncertain, but the outlook is positive.

It is good to be aware of the stories highlighted in the media, but they are the exceptional cases. For many, leasehold ownership can still be a good way of getting onto the property ladder, regulating the use of property with shared facilities.

Having a solicitor who fully understands leases, and is up to date with the latest developments, means you can be confident about your purchase whatever its tenure.

Leaseholds may have more ongoing costs than freeholds. However, with the right professional advice, you should not have any unpleasant surprises.

For further information, please contact Debbie Pearce in the residential property team on 01328 863231or email debbie.pearce@hayes-storr.com.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.