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Costs of leasehold

The hidden costs of leasehold property

| Published on February 15, 2022

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 definitely more issues with a leasehold home than a freehold one,’ agrees Sue Hobby, a Partner in the residential conveyancing team. ‘However, this does not mean you should discount a leasehold property. A good solicitor will help you to mitigate risks and there are also government reforms in the pipeline, which will increase protection.’

Here we look at some of the issues and the additional costs which arise with a leasehold property.

Ground rents

As a leaseholder, you will almost certainly have to pay ground rent. Traditionally, this is usually a small amount. However, in recent years, some developers have used ground rents to create an additional income stream which they then sell on to investors. Instead of moderate increases over the lifetime of a lease the ground rent increases exponentially. For example, an initial ground rent of £200 which doubles every five years will be £6,400 by year 25 making it hard to sell or remortgage.

It is hoped there will soon be changes in the law which mean any new ground rent can only be for a token amount however, if limitations on the amount of ground rent are imposed in the future these are unlikely to affect existing leases and it is important to check the lease terms very carefully.

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, resulting in a very high service charge bill.

Your survey and solicitor’s enquiries should reveal any problems with cladding. 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. Service charge clauses should set out clearly which services the landlord must provide, and the mechanism for funding and delivery should be fair and reasonable.

Your solicitor should investigate any potential service charge disputes as part of their pre-contract enquiries, so you should not be caught out. We would also ask about planned expenditure and the building’s maintenance so you could then form a more accurate view of the likely future costs.

The cost of getting consents

As a leaseholder you may need to apply for your landlord’s consent for certain things. For example, if you want to make structural alterations. Generally, they will not be able to withhold consent unreasonably, and their costs for dealing with your application must be reasonable. However, these could still be higher than you expect, and the process can be time consuming and stressful.

Reforms and the future of leasehold

The Government has embarked on a major programme of reform which includes making it easier for leaseholders to extend their lease, to acquire the freehold, or to buy out their ground rent.

For many, leasehold ownership can still be a good way of getting onto the property ladder. 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.

For further information, please contact Sue Hobby in the residential conveyancing team on 01202 714588 or email s.hobby@hkilaw.uk.

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.

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