Leasehold houses: research shows more than half of owners didn't understand what they were buying

Over half of leasehold house owners did not understand what being a leaseholder meant until after they had purchased their property, new research has shown.

Over 1,100 leasehold homeowners were surveyed by NAEA Propertymark, with 57% of respondents saying they had failed to understand how leaseholds worked before buying one. 50% of those surveyed were first time buyers and 62% felt that their homes were mis-sold to them.

Specific complaints include 48% of respondents having been unaware of the way that their ground rents would increase and 51% feeling that they have been left “paying for the same thing twice”.

Overall, 94% of the leasehold homeowners covered by the survey regretted buying a leasehold and 93% said they definitely wouldn’t buy another leasehold property.

What is a leasehold property?

When you buy the freehold on a property, you are buying permanent ownership of that property. With a leasehold, however, you are paying the freeholder for the right to live in the property for a fixed period of time, with the freeholder retaining ultimate ownership of the property.

Residential leases usually last for a long time – typically from decades up to hundreds of years – and you can resell them (although the value will diminish as the length of time left on the lease diminishes). You will also normally have to pay annual ground rent and service charges, which cover maintenance of the building, upkeep of communal areas and other necessary expenses that the freeholder incurs.

Around 1.4 million residential properties in England are leaseholds. While it has long been common for flats to be sold on a leasehold basis, in recent years, many thousands of new-build houses have also been sold as leaseholds.

What is the problem with leasehold houses?

For many types of properties, such as blocks of flats, leaseholds can be a good way to own a property. This is because they allow a single management company to be responsible for the communal spaces and maintaining the fabric of the building, rather than the individual occupants having to try to sort this out themselves.

However, in recent years there has been growing controversy over the issues of ground rent and service charges for leaseholds, particularly in relation to new build houses.

Where new houses were once almost always sold on a freehold basis, it has become increasingly common for developers to sell completed houses on a leasehold basis instead. This has become a particular issue as many of these leaseholds come with terms, such as the ground rent doubling every ten years, that means the annual costs of owning one of these homes can rapidly escalate.

These rising costs not only make living in a leasehold more expensive for the homeowners, they can also cause issues if they wish to resell. This is because many mortgage lenders are reluctant to lend against leasehold homes with escalating ground rents, as they know there is a strong risk of the homeowners being pushed into financial difficulties. It can therefore be very hard for the owners of new-build leaseholds to find a buyer willing and able to take over the lease.

It is also common practice for the developers to sell on the freehold on new homes to off-shore companies, often with very long leases. This makes it much harder and more expensive for leasehold homeowners who want to try to acquire the freehold on their property.

While the government has announced plans to crack down on “unfair and abusive practices within the leasehold system”, including banning the sale of most new-build houses on a leasehold basis, this still leaves many existing leaseholders in a potentially difficult situation.

How to protect yourself when buying a new home

When buying any kind of property, one of the main things you can do to protect yourself is to make sure you use an experienced, reliable conveyancing solicitor to handle the purchase for you.

A good conveyancing solicitor will advise you on any and all issues you need to be aware of, including whether the property is leasehold or freehold and exactly what costs will be involved, both in the short and long-term. This means that, for example, if the ground rents are set to double every ten years, you will know this in advance and can consider whether this is something you are willing to accept.

Interestingly, the NAEA survey found that 65% of the leasehold buyers surveyed used the solicitor recommended by their house builder. While this is not necessarily a problem, we strongly recommend shopping around and making sure you find a conveyancing solicitor you are happy with before making such a significant personal and financial commitment.

Whether you are a leaseholder or freeholder of leasehold property, Preston Redman’s property solicitors have the expertise you need to protect your property interests. Contact Adrian Falck, Partner on 01202 292424 or by email acf@prestonredman.co.uk.