Time trap: new buyers fall foul of a medieval tradition
Sunday 26 November 2006
You can always rely on the British to keep alive some quaint, and often impractical, traditions.
Of these, the leasehold system of property ownership, a concept that dates back to the 11th century, has to be one of the most confusing - not to mention potentially expensive.
These days, the people struggling with the archaic rules concerning leases are more often than not first-time buyers and sellers, with little experience of the market and little cash to spare. This is because the vast majority of leasehold properties are flats - a typical first-time buy.
If you're buying a property and are not buying the freehold - or part of it - you must buy a lease from the landlord or, in the case of many large blocks of flats, the managing agent who owns the building in which it is situated.
"Leasehold is basically a form of tenure," explains Anthony Essien, principal adviser at the Government's Leasehold Advisory Service. "Just as when you rent a property for a term of six or 12 months, a lease allows you to 'rent' from the freeholder for a period of 99, 125 or even 999 years. As this is such a long timespan and the lease allows exclusive possession - even from the landlord - it amounts to ownership."
The freeholder is responsible for the upkeep and maintenance of common parts of the building as well as its buildings insurance. These expenses are funded by annual service charges, which can vary widely, but are always payable by every leaseholder in the building.
Even if first-time buyers have got their heads around how the system operates, there are still pitfalls to avoid before they can purchase a leasehold property, says Rob Clifford of broker Mortgageforce.
"Most are totally unaware that lenders impose a minimum time that the lease must extend beyond the term of the mortgage."
Halifax and Abbey, like most lenders, insist that a lease has at least 30 years left to run after the borrower's mortgage has expired. This means that, on a standard 25-year mortgage, they will usually be looking for a minimum of 55 years on the lease before they lend on a property.
Other mortgage lenders are more demanding.
Leeds building society requires another 40 years after the mortgage has expired, so here the minimum lease is 65 years.
"Lenders insist on this [as a] 'minimum excess' to mitigate any threat that could affect the future market valuation of the property," explains Mr Clifford.
The amount of time remaining on the lease can affect the property value - but only within certain boundaries, says Charles Smailes, president of the National Association of Estate Agents (NAEA).
"If the lease is short enough to raise a lender's eyebrow, it could significantly reduce the value," he explains. "But once the lease is clear of these minimums, the time difference becomes more incidental. For example, it would make no difference to the property value if the lease was 99 years or 125 years."
However, many buyers can begin to get twitchy around the 75-year mark, according to Mr Essien. In this case, it's common for buyers to ask the vendor to extend the lease as a condition of sale - usually up into the safety zone of 99 years or beyond. The vendor has no obligation to do this but, with a view to getting a sale or a higher price, they will often make a proposal to the freeholder to extend.
If no response is received or the freeholder refuses, the seller can serve a notice under the 1993 Leasehold Reform Act - provided the lease has been held by the seller for two years.
Under this law, the freeholder must extend the lease for a further 90 years.
There is usually a cost for extending a lease and - in theory, at least - that cost is uncapped.
It's difficult to pin down any industry averages but you can expect to pay anything from a few hundred to several thousand pounds, depending on the type of property and the length of the lease.
It may be either the buyer or the seller who ends up paying for the new lease. The state of the housing market - and the individual property - at the time of the sale can create some room for bargaining here. But the onus is likely to be on the vendors, since only they can get the lease changed, and it will be in their interest to do so if they want to sell their property.
Where a leaseholder considers the cost of extending the lease to be "unreasonable" and a notice has been served, they can take their case to the government-sponsored Leasehold Valuation Tribunal.
The LVT describes itself as an "informal court" whose powers extend beyond the valuation of leases to issues such as service charges, ground rents and enfranchisement.
A lease extension process can easily run into problems. For example, it may not be possible to contact the freeholder, perhaps because they have died or are living abroad. Absentee freeholders can make life difficult for leaseholders, especially if part of the lease has been "sublet" to a management company.
In any case, brushing off the dust on a property's current lease is an inherently risky move, as it will trigger a review in the ground rent paid for that property, says Mr Smailes. "If [rent] had been set in 1980 at £150 a year, for example, it could easily be extended to £1,500 and beyond," he warns.
The Commonhold and Leasehold Reform Act 2002 introduced a new form of tenure called commonhold, which came into effect in September 2004. The Act aimed to simplify the process of extending a lease by having each tenant own the freehold of their own flat and making them members of one "commonhold association".
The problem here is that the whole building must operate on a commonhold basis and the process of switching the building from leasehold to commonhold is a long and complex one, although it doesn't involve consent from the landlord. In fact, few new commonhold flats are being built as developers do not have the incentive of profiting from the freehold.
125 years on the lease will see this sale kick off
Professional rugby player Rodd Penney is buying a two-bedroom flat in St Albans, Hertfordshire, on which the vendor is negotiating a lease extension.
"I made an offer in early September, based on the knowledge that the lease was already in the process of being extended from its current 73 years to 125 years," says the 28-year-old, who plays for Saracens and is originally from New Zealand.
Since then, Rodd, a first-time buyer, has spent £465 on a valuation with his mortgage lender, Birmingham Midshires, as well as around £500 in legal fees.
"The vendor could change their mind and pull out at any time and I'd lose this money," he concedes. "But with the lease taking longer than anticipated, I can do nothing but wait."
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