What you need to know to facilitate a smooth transaction
When you purchase a leasehold property, your ownership is for a predetermined period, based on an agreement with the landlord or freeholder, who retains the overarching ownership of the land. This contract specifies the duration of your property ownership and its conditions.
Upon the expiration of the lease, the ownership reverts to the freeholder, leaving you without any claim to the property, irrespective of the mortgage status. Notably, flats predominantly fall under leasehold titles, a trend that has extended to new-build houses since the early 2000s.
Approval from the landlord
Selling a leasehold property mirrors the process of selling a freehold, except that approval from the landlord is necessary to transfer the lease to the new buyer—a process known as “assignment.” Before initiating the sale, it’s crucial to fully comprehend the lease terms to ensure compliance with the assignment conditions. Soliciting the assistance of a conveyancer or solicitor is vital in facilitating a smooth transaction.
Selling a leasehold can present unique challenges. These include selling properties with short leases (under 80 years), increased paperwork, high-ground rents that may escalate, and various landlord fees, such as administration and exit/transfer fees. Additionally, high service charges and strict compliance with lease terms can deter potential buyers.
Extending your lease
The remaining time on your lease significantly influences your property’s marketability and value. Properties with shorter leases are more challenging to sell and often fetch lower prices. However, the Leasehold Reform Act of 1993 provides leaseholders the right to request a 90-year extension, given they meet specific criteria, including a minimum two-year ownership of a long lease.
The cost of extending a lease is contingent upon the remaining lease term and the property’s value. In contrast, a shorter lease diminishes property value but increases the premium for an extension.
Reforming leasehold ownership
In a pivotal move towards reforming the leasehold system within England, the government initiated an inquiry in 2017 to address the growing concerns surrounding the complexities and perceived injustices of the leasehold property market. Three prominent measures stand out among the myriad proposals for legislative consideration.
Notably, in June 2019, an announcement by the then Housing Minister marked a significant turn in policy direction: new-build houses were to be exclusively sold as freeholds, barring exceptional circumstances. This decision aimed to alleviate countless leaseholders who found themselves trapped in their own homes, grappling with the exorbitant costs of ground rent and service charges that severely hindered their ability to sell.
Implementing fair practices
The changes are poised to dismantle the practice of selling new-build houses under leasehold terms in England and introduce a nominal ground rent for flats, potentially reducing it to zero. To further fortify the rights of leaseholders, the framework proposes a fixed time limit of 15 working days and a cap on fees of £200 for those wishing to purchase their homes.
Additionally, adjustments to Help-to-Buy contracts have been promised to exclude the sale of new leasehold houses. A provision that obligates landlords to relinquish half the profit from any increase in property value upon lease extension for leases nearing the 80-year threshold has also been included. The Help-to-Buy scheme is closed to new applications in England and Scotland. In Wales, it is available until 31 March 2025.
Towards ownership ease
If ratified, these legislative amendments will significantly uplift the prospects for owners of properties with short leases, making the acquisition of freehold both accessible and economically viable. Currently, leaseholders facing development plans by landlords, which could inflate the property’s value, find themselves cornered into compensating for potential profits not realised by the landlord.
The proposed legal alterations ingeniously empower leaseholders, granting them the leverage to either veto the landlord’s development ambitions or take on the development works themselves, provided they fairly compensate the landlord.
Challenges leaseholders face
The revelation of these proposals has been met with optimism, particularly among prospective homeowners and existing leaseholders eager to dispense with their properties. Despite this enthusiasm, the enactment of these reforms remains in limbo, as indicated by a House of Commons briefing dated February 7th, 2021, which alluded to legislative action in the forthcoming Parliamentary Session.
Yet, the gestation period for these reforms is anticipated to span several years before their full incorporation into law. The perennial challenges leaseholders face, including escalating ground rates and the encumbrance of additional costs that can surge alongside property valuation or at predetermined milestones, underscore the urgency of these reforms. Such financial burdens not only jeopardise the marketability of properties but also encumber their mortgageability for prospective buyers.
Considerations for leaseholders
For those entangled in the leasehold quagmire, acquiring the freehold—or ensuring the lease extends beyond 100 years—emerges as a pragmatic strategy to mitigate future financial liabilities and preserve the property’s allure to potential buyers. The impending ban against selling new-build houses on leasehold terms promises to rectify this issue prospectively.
However, individuals contemplating the purchase of existing leasehold properties are advised to diligently assess the lease term, acquaint themselves with renewal expenses, and explore avenues to secure the freehold.
The new Labour government has announced it is committed to overhauling the leasehold structure but is wary that there is no quick fix to change a centuries-old system. They plan to enact the Law Commission’s remaining recommendations when there is time. There is also pressure for Labour to go beyond this, such as making commonhold the default tenure for new houses.
Are you ready to talk about leasehold property ownership?
Should you require further assistance or information regarding the transition from leasehold to freehold ownership or if you are navigating the complexities of the proposed legislative changes, our team will provide the support necessary to make informed decisions in this evolving landscape. Get in contact with us today to discuss your options with an adviser.
Please note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
