Hold that thought: inside the ‘national scandal’ of leasehold properties

April 13, 2017

Hold that thought: inside the ‘national scandal’ of leasehold properties

By Frankie Crossley

Over 75 per cent of apartments in Hampstead are leasehold, whilst investors are cashing in by buying up freeholds in new builds throughout the capital. Here’s what you need to know about owning a leasehold property in north London

Do you really own your own home? The UK’s official rate of homeownership has fallen from 72 per cent in 2003, to 64.6 per cent in 2014. Excluding leasehold properties that are not legally owned by owner-occupiers, the true rate is 58.9 per cent, just 0.9 per cent higher than in 1981. In Hampstead and Kilburn 76.6 per cent of apartments are leasehold, according to the Leasehold Knowledge Partnership, 2014.

‘Homes Held Hostage’, a new HomeOwners Alliance report illuminates a lack of consumer understanding and malpractice in the sale of leasehold tenures, with under half of flats listed by agents clearly displaying the status of the tenure. Leasehold properties are now ubiquitous in the capital, with the number of new builds sold as leasehold almost doubling since 1996 to 43 per cent. 42 per cent of leaseholders surveyed did not know the time remaining on their leases.

“Unscrupulous and avaricious actors within the property industry are using sharp leasehold practices to line their own pockets and fleece householders,” says Paula Higgins, chief executive of the HomeOwners Alliance.

The report hits out at agents who fail to display the tenure offered and the length of the lease. It found that across 100 flats listed on a property search website, only 24 per cent of adverts placed were specific about the length of time left on leases.

“The situation is exacerbated by the fact that many estate agents are themselves ignorant about leasehold and fail to inform and educate their customers properly,” said Higgins.

One problem with a short lease is that lenders might not lend on a property that has fewer than 50 years left.

“Never rely on an estate agents estimate on what a lease extension might cost you,” advises Camilla Dell, managing partner at Black Brick Property Solutions. Her advice is to ensure to ask estate agents what the length of the lease is.

“It’s the estate agents job to accurately state this, along with the service charge and ground rent on the sales particulars,” she explains.

So what is all the fuss about? Leasehold tenures are sold as a lease from the freeholder to use a property for a number of years. Leaseholders pay an annual ground rent, maintenance fees, service charges and buildings insurance. ‘Ownership’ is undercut since permission from the landlord often has to be granted to own pets, sublet rooms or make changes to the property.

“It is a national scandal,” says Sebastian O’Kelly of the Leasehold Knowledge Partnership.

“No other home owners in any jurisdiction are so disempowered as those buying leasehold property in England and Wales – the only jurisdiction in the world that has it.” Even in Scotland, leasehold is a rare phenomenon, but in London the market is booming.

There are currently 5 million occupied leasehold flats and maisonettes in England and Wales, meaning that young buyers who often occupy them are disproportionately affected. In contrast, there are just 432,820 owner-occupied leasehold houses. There are currently 1.144 million privately-owned, owner-occupied leasehold flats or maisonettes where a share of the freehold is not held by the leaseholder.

The government has recognised the need to tackle the issue of leaseholder abuse, so far with little progress. Sajid Javid said in a statement on the Housing White Paper in February: “We will tackle the scourge of unfair leasehold terms, which are too often forced onto hard-pressed homebuyers.”

HOA’s recent Homeowners Survey showed that 49 per cent of leaseholders said they had experienced problems with their freeholder, and almost a quarter complained about the cost of fees and building works.

“This report shines new light on the difficulties faced by some home-owners who own their home on a leasehold basis often in the dark about the exact terms of their lease and currently unprotected from punitive terms including huge rises in rip-off ‘ground rents’,” says Labour Shadow Housing Secretary, John Healey.

42 per cent of those surveyed did not know the length of their lease. Of those that knew, almost one in four properties has less than 80 years remaining. Lease extensions can be carried out if the homeowner has occupied the property for more than two years, at an estimated cost of £4 billion to leaseholders as a whole. The complex process includes valuations and legal fees costing upwards of £500 and £750 respectively depending on quality, location and the existing lease.

Camilla Dell advises that buyers should feel happy to proceed with purchasing properties with at least 80 years or more left on the lease, although short leases needn’t be avoided.

“In fact,” she explains, “they can even be quite good as investments as you pay a lower price for the property to reflect the shorter lease. And if you plan on renting it out, the yield will be higher.”

High yields are certainly on the minds of developers, with four in 10 new builds offered leasehold. “Developers and estate management companies rely on leasehold to bamboozle consumers, charge exorbitant administration fees, ever increasing ground rents and render properties unsellable,” argues Higgins. The HOA demands new builds be mandatorily sold as commonhold, allowing buyers a freehold tenure with common responsibility. Yet given skyrocketing ground rents, developers are reluctant to offer tenures which rid them of freehold privileges.

“Developers and anonymous investors, often offshore, see the value of residential freeholds to blocks of flats,” explains O’Kelly. “Developers have increased income streams to the freehold to the highest degree possible.” He argues that high ground rents, short leases, fees and commissions and controlled management of blocks fundamentally disempower residents.

The homeownership crisis grows worse year on year as young people struggle to get a foothold on the housing ladder, and are excluded from a housing market which has forgotten them. Those who do stump up the cash to buy a leasehold tenancy do not own their own home and are stuck in a rut of ever-rising ground rents which prohibit them from purchasing freehold. “An entire generation of home buyers are seeing wealth erosion: they buy homes, but investors hitch a ride at their expense by owning the freeholds,” says O’Kelly.

With the explosion of buy-to-let and the failure to build good quality new and affordable homes, the housing market is failing young people and committing them to the label of ‘generation rent’ forever.

Leasehold in north London

Leasehold flats, maisonettes and apartments are disproportionately found in inner city areas in the capital. Half of London’s housing stock by number of properties is leasehold, with a third of all leasehold in England and Wales found in London.

Hampstead and Kilburn: 76.6 per cent

Westminster North: 85.5 per cent

Hornsey and Wood Green: 59.3 per cent

Finchley and Golders Green: 48.4 per cent

Source: Leasehold Knowledge Partnership, 2014

Right or Wrong?

The leaseholder has to take responsibility for common parts of the property. Wrong: this is the responsibility of the landlord.

An incoming leaseholder is not liable for outstanding charges. Wrong: check with a solicitor, as buyers can be liable for outstanding service charges and ground rent associated with the lease.

Leaseholders can sublet as they chose. Wrong: they must seek consent from the landlord.

The landlord can enter as they choose. Wrong: leaseholders have the right of quiet enjoyment without unreasonable interference.

The landlord can carry out works whatever the cost. Wrong: the landlord must consult on major works costing more than £250 to each leaseholder.

The landlord can make long-term contracts to the leaseholders cost. Wrong: the landlord must consult the leaseholder if expected to go on for longer than 12 months at more than £100 a year to the leaseholder.

The landlord can sell the freehold as they choose. Wrong: leaseholders have right of first refusal and the landlord must offer the freehold to leaseholders first (with some exceptions).

Leaseholders can have pets and make changes to their property. Right and wrong: permission must be granted by the landlord first.

Leaseholders can group together to buy the freehold. Right: satisfying certain conditions, the sale of the freehold can be enforced.

Leaseholders can do nothing about management if nothing is wrong with it. Wrong: they can group together and use the right to manage if they want to change the management whether deficient or not under a ‘no fault, no compensation’ process. If management is deficient, leaseholders can apply to the First Tier Tribunal for an appointed manager.

The landlord must provide his contact details. Right.

Leaseholders can challenge service and administration charges. Right: they can apply to the First Tier Tribunal whether already paid or not.

Leases cannot be varied. Wrong: with the agreement of all interested parties, it can be varied.

Leaseholders can extend the lease. Right: you can add 90 years to the existing lease with price agreed with the landlord.

Nothing can be done about poor management. Wrong: landlords must belong to a government approved redress scheme.


Camden named amongst top five property investment hotspots, but London prime property market remains hard to predict

By Frankie Crossley

Camden is fourth in a list of property investment hotspots across the UK, with prices predicted to rise 33.9 per cent over the next five years.

The borough placed behind Richmond upon Thames, St Albans and Three Rivers.

The Barclays UK Property Predictor indicated prices would increase at a rate of 6.02 per cent a year..

London as a whole is predicted to see an average annual increase of 2.27 per cent, or 11.88 per cent by 2021.

As for the UK as a whole in the next five years, Barclays expects the average annual price increase to be 1.31 per cent a year, or 6.1 per cent by 2021.

The report estimated a nationwide price rise of 6.1 per cent by 2021, bringing the average property value to just shy of £300,000.

Average house prices are expected to rise to £290,714, up £16,714 from today’s average.

38 per cent of high net worth investors (HNWIs) anticipate a price hike in the north of the country, spurred on by high employment, increasing average earnings and promising business start-up rates outside the capital drawing entrepreneurs looking to make better profits than overhead heavy London.

Not often the focus of housing optimism, millennials are purportedly behind the predicted buoyancy of the investment market according to Barclays, that’s provided they have refrained from splurging on avocado toast and have a cash to splash.

Property made up 41 per cent of the portfolios of those surveyed, 18 per cent more than over 55s.

Younger HNWIs were also more optimistic, with 75 per cent aiming to increase the proportion of property in their portfolio by 2021. Just one in 10 over 55s said the same.

The bank of mum and dad is clearly paying dividends to well off property pundits who benefit from a plumper purse. Indeed, young HNWIs were more likely to own more than one property than their older counterparts.

The rental market is prime property for millennial investors, with 65 per cent of those looking to buy doing so in anticipation of rental rises.

23 per cent said they would use a buy-to-let mortgage to fund procurement, in contrast to just 7 per cent amongst older investors. Just under half (48 per cent) of their annual income was generated from rent.

Dena Brumpton, CEO, Wealth & Investments at Barclays, said: “It’s encouraging to see that property is still viewed as an important part of the investment portfolio with high net worth investors typically owning three properties and over a quarter planning to buy property because they believe that it offers long-term investment security.”

Camilla Dell, managing partner and founder of Black Brick Property Solutions is less encouraged. “I would say [this] is quite a simplistic way of looking at the market because the London property market is not homogenous; different parts of the market will behave and do very different things in the next five years,” she said.

“Savills are actually predicting Prime Central London growth of 21 per cent over the next five years cumulative, so quite a bit more than what Barclays’ price predictor is showing. Knight Frank are suggesting that east London will increase far more than more traditional west London and Prime Central London postcodes. So there’s quite a big discrepancy in their data.”

Unfortunately, the buying agent is also less convinced that Camden will perform better than elsewhere. “I’ve seen lots of research around HS2, Crossrail 2, east London because of all the technology companies investing there but I can’t say I’ve come across anything that says Camden is a hotspot,” says Dell.

Instead, Dell offers that the most growth will be seen in the market below £1 million outside Prime Central London. “That’s where we see the most growth happening over the next five years where we still continue to see supply and demand in balance and first time buyers competing with investors.”

Predicting the future in today’s turbulent market is quite the challenge given the number of known unknowns: Brexit and next week’s General Election to name but a few, and agents will no doubt be reluctant to put figures on future sales in a market which is already suffering the consequences of confusion and uncertainty.

“Most forecasts actually are predicting that London will flat line over the next two years because of uncertainty over Brexit,” said Dell.

“Actually, the market could fall in certain areas and certain price brackets if we suddenly see large numbers of people leaving the city. Potentially we might see price falls in certain parts of the market; that market between £2,000,000 to £5,000,000 is particularly vulnerable.”

Barclays’ report is the latest in a line of optimistic property reports which agents claim have no stake in the reality of a market encumbered by sluggish sales and slashed asking prices as a result.

“Sellers in the current market are having to cut their asking prices in order to get people in through the door,” explained Dell. “We see that more and more, particularly on properties priced from £2,000,000 upwards in central London. That’s been the part of the market that’s been the most susceptible to things like Stamp Duty increases.”

The very top end of the market is a “micro market” that operates independently and is less susceptible to political and economic fluctuations due to the availability of capital to buyers in the £20,000,000 plus market.

As for the future, Dell was cautious rather than pessimistic. “I think in the next two years there’s a lot of uncertainty because of Brexit which is likely to affect London more than any other market,” she said.

There is a silver lining to the great Brexit stormclouds brewing in Brussels, however. “Potentially that uncertainty brings opportunities for buyers because they can take advantage of that and that’s certainly what we’re doing at the moment for our clients.”

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