Leasehold properties: should they just be avoided?

The leasehold system in England and Wales is a relic of feudal law dating back to the 11th Century. In the middle ages absolute ownership of all land was vested in the Crown. Land ownership was in the form of a complex system of tenures known as subinfeudation where, essentially, large areas of land were leased by the Crown to Lords and other important persons. In turn, those large areas of land were split up into smaller plots and under leased to subtenants, who often split the plots up again, and so on and so forth until, until at the bottom of the pyramid, the subtenant granted surfs the right to work on a plot of land for a fixed period of time.  The subinfeudation system became increasingly complicated, and was eventually abolished by the statute of Quia Emptores in 1290.

In the early 1900s around 90% of housing in England was privately rented. Regulation was light and tenants had few rights. The Labour government’s introduction of the various Rent Acts in the early 20th Century held down rent levels and gave tenants a wide range of rights, including security of tenure. This made being a landlord significantly less lucrative. Many landlords began selling their properties on long leases of 60-99 years in order to release the value in the properties without losing absolute ownership of the land. This was the beginning of the modern system of leasehold property.

In the 1950s and 1960s an astronomical number of flats were constructed in the post-war building boom. Flat ownership introduced a series of complexities not associated with houses, such as how to organise the maintenance and repair of the structural elements and communal areas of a building, not to mention ensuring that each of the flat owners contribute a fair proportion of the cost of those works. These issues were easily address by the system of leasehold property ownership, which allowed landlords to set the conditions of ownership of a property (including requiring the owner to contribute to repairs) in a contract, known as a lease. Thus the system of leasehold property ownership grew.

However, there can be a number of drawbacks to owning leasehold property. A lease gives the owner of that lease the right to occupy a property for a limited period of time. When the lease comes to an end so, in theory, will the owner’s right to live in their home. There are statutory provisions that, in some cases, give the right to continued occupation after expiry of a lease, but at best this will only be as an Assured Tenant. Consequently, unless the lease is very long, it can be difficult to sell – buyers are often wary of leases with much less than 85 years left to run, and it can be difficult to secure mortgage finance against leases below 60 years. Flat owners do have the legal right to extend their leases by 90 years, but the freeholder has to be paid compensation. This can be very expensive, and the process can be made difficult by the freeholder.

Most leases will contain a provision for the payment of rent (often called ground rent). It is fairly typical for the rent to increase through the term of the lease. In many cases the increase will be modest and will operate to do no more than protect the freeholder against inflation. However, in some cases the rental increases can be dramatic. It’s not unheard of for ground rents to double every 5-10 years, leading to annual rents of tens of thousands of pounds in the latter years of the lease. Again, the same legislation that entitles flat owners to extend their leases also entitles flat owners to (in tandem with extending) reduce their ground rent to a peppercorn. However, the cost of compensating the freeholder when the ground rent is onerous can be very significant.

Leases will often provide for the maintenance and repair of the external elements of the building and communal areas to be organised by the freeholder with the leaseholders picking up the bill. Unscrupulous freeholders have been known to use this as a way of generating profits by way of backhanders from contractors. Again, there are statutory provisions which require freeholders to follow certain procedures and give tenants the right to appeal against unfair service charges, but the process can be difficult, expensive and uncertain. Even where the landlord acts properly the lack of control over when repairs are carries out, to what specification and at what cost, can be a significant issue for leaseholders.

Most leases will contain restrictions on alterations, which can prove problematic when a leaseholder wants to make changes to a property. In almost all cases significant alterations will require the freeholder’s consent, and that consent will almost invariably only come at the cost of a Licence to Alter drawn up by expensive surveyors and solicitors, with the leaseholder picking up the bill. In some instances, the freeholder might even be able to refuse permission altogether or charge a significant premium for consent.

So, should leasehold properties just be avoided? If you have the option of owning a freehold property you would do well to avoid the potential headaches associated with leasehold property ownership. However, if you are buying a flat then buying leasehold is almost unavoidable. If you are buying a leasehold property you should read the lease in full and discuss it in detail with your legal adviser to ensure that you fully understand the implications of the lease and any issues which may arise. Pay particularly close attention to the length of the lease, the level of the ground rent, the provisions for maintenance and repairs, and the clauses related to alterations.