Leasehold Properties: Understand the implications & avoid the new property trapMarch 03, 2017
Some developers of new properties are selling their houses leasehold rather than freehold - here’s what you need to know to avoid the new property trap.
Property developers see leasehold homes as a second chance to profit as they sell not only the house, but also its freehold, which normally goes to an investment or insurance firm.
Traditionally, leasehold properties have been flats not houses. Other leaseholds are for older houses with leases drawn up more than a century ago with owners paying a tiny amount of rent (sometimes less than £10 per year).
Nowadays, it is becoming more of a regular occurrence for developers to sell new properties with shorter term leases of just 99 or 125 years with an ’initial’ annual ground rent starting at £250, but increasing in increments every 10 or 25 years.
One reason behind this is to make the initial price of the property look more attractive, but when the owner has the statutory right under the Leasehold Reform Act to buy the freehold after owning their house for 2 years they can be charged between 10 and 20 times the ground rent but the price will depend on the value of the house, ground rent and the years on the lease. Also, it is not uncommon that the owner of the house will also have to pay the landlord’s legal and surveyor’s fees as well of course their own legal costs, thus making it a very expensive purchase.
More importantly, the developer/landlord could sell the freehold to an investment company who may try to sell the freehold at an inflated price knowing that a freehold property can be more attractive to prospective buyers.
When looking to purchase a new property, the sales office staff will have limited knowledge and may not be trained to advise on problems associated with short leases and rent increases.
Therefore, before paying a reservation fee and committing yourself to the purchase, make sure to check that the reservation form states that in the event of you not proceeding for any reason with the purchase, the whole of your reservation fee will be immediately refunded as you will not have the benefit of looking at the Lease when making your reservation.
If not, it’s best to ask your conveyancer to check all the paperwork before you pay any reservation fee to the developer. Your conveyancer will probably charge you an additional fee to examine the paperwork outside of their normal standard conveyancing fees for the house purchase. However, you will then be able to make an informed decision whether to purchase or not.
Bear in mind that if you purchase using solicitors recommended from a panel by the developers, then there may be a question of their professional impartiality!
Finally remember that there are still lots of developers who continue to sell their properties as freehold, which makes the process easier.
For more information on leasehold properties or any other conveyancing issues, contact our team of local property experts on 01275 843213.