Leasehold vs. Freehold:how to avoid the surprise costs and pitfalls of buying a home on 'rented ground'

Most new London homes are leasehold — which means owners pay ground rent and service charges as their lease gets shorter with every year.

More than 95 per cent of new-build homes sold in June in London were leasehold, according to the Land Registry. This means that despite the fortune you have paid for it, your new flat or maisonette is almost certainly standing on rented ground.

For this privilege you are likely to have to pay an annual fee, known as ground rent, and monthly service charges. Neither is fixed and both may rise substantially over time. Also, from the moment you get the keys, your right to remain in your home starts ticking down. At some point, you either need to renegotiate the length of your lease, or watch the value of your property substantially diminish.

WHY ALL THE FUSS?

There are two types of legal property ownership in the UK: freehold and leasehold. If you own the freehold, then you own your home outright. You own the property and the land it sits on, in perpetuity.

Leaseholders aren’t as lucky. Despite “buying” the property, they have really only leased it from the freeholder — called the landlord — for the period of the lease. Once the lease ends, the property reverts to the freeholder. This is part of the reason why you need the freeholder’s permission to make significant alterations.

The prevalence of leasehold properties among London new builds isn’t new. Land Registry data shows 98 per cent sold in 2010 were registered as leaseholds, very similar to the latest figures. This contrasts sharply with the national picture, where only 43 per cent of new builds registered in England and Wales last year were leaseholds.

To an extent the difference reflects London’s lack of space. New-build flats, piled on top of each other, are much cheaper than new-build houses standing in their own grounds. For London buyers, finding a new home usually boils down to choosing between one flat scheme or another. For developers, building leasehold flats has many advantages. In additon to selling the flats, they also produce new income streams, from ground rent and charges.

Annual ground rent payments have a lot of similarities with bond interest payments. This makes them attractive to life assurance companies, pension funds and private investors. In many cases, these investors will be willing to buy the promise of future ground rent payments before the block is finished. This private sector cash can help ensure the development’s completion, easing London’s housing shortage.

Annual service charges are more contentious, as minimal regulation allows room for exploitation. Consequently, complaints about unfair charges are frequent.

DO YOUR HOMEWORK

Another problem is the length of the lease. New-build leases start at about 99 years with some as long as 999 years. With UK average life expectancy lower than all of these at 81.5 years, you may wonder “why all the fuss?”

The issue is that most banks and building societies won’t lend on a property with a lease of less than 75 years. This makes it hard to re-mortgage or for a prospective buyer to obtain the finance to buy the property. Once you enter the realm of only selling to cash buyers, the price can tumble quickly.

This makes it increasingly costly to extend the lease once it has fallen below 80 years. For new-build properties with a 99-year lease, it isn’t long before these issues start to bite. If you bought a new-build property in the Eighties with a 99-year lease, you could be facing these problems now.

Fortunately for Londoners, many of the new builds shooting up now have ultra-long leases. Galliard Homes says its properties are “usually” offered with a 999-year lease. Similarly, Taylor Wimpey’s latest developments have either 250-year or 999-year lease. This is not always the case, so make sure you check out the lease length remaining on resale homes.

Shared-ownership properties are the other exception. New-builds now tend to come with 125-year leases. Should you want to extend that in the future, you may need to pay a fee that exceeds your percentage holding.


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