Leasehold homeowners are ‘overpaying to extend’ leases

Leaseholders are being charged extortionate fees to extend their leases, but that’s not the only expensive problem plaguing owners and buyers

HOA research shows that just 58 per cent of leaseholders questioned said they knew the length of their current lease

Homeowners living in leasehold properties are being asked to pay extortionate prices to extend the leases on their homes, the London School of Economics and Political Science (LSE) reports.

LSE analysed data from 8,000 sales of leasehold properties, showing how the sale price varied depending on how much time was left on the lease.

The cost of extending a lease relies on a concept called relativity, which describes how the value of the home drops as the lease term runs down. The lower the relativity, the more it costs to extend the lease.

It’s a tricky concept, but the outcome can have a dramatic effect on costs. Relativity is expressed as a percentage, and it’s the difference in value between a short lease and an effectively freehold home – such as one with a 999-year lease and low, fixed rents. The lower the relativity, the more it costs to extend the lease.

However, the LSE research suggests that the current practises underestimate the value of leases when there are under 70 years remaining. And that means that leaseholders who pay to extend their leases could be paying thousands of pounds too much.

James Wyatt, a chartered surveyor and one of the authors of the research, said: “Our findings mean that many leaseholders may be seriously overpaying for lease extensions. Our alternative, evidence-based calculations could result in savings in the order of thousands of pounds for most leaseholders, and much more for owners of some of the most expensive properties.”

The findings are yet another blow for leaseholders who have been rocked by a series of scandals suggesting they are being overcharged, under-informed and potentially even exploited.

Campaigning against clauses

It was recently revealed that some developers, including Taylor Wimpey, were selling homes with 999-year leases but adding clauses that doubled the ground rent every 10 years. That meant they incurred significant additional costs within just a few decades, affecting their sale value.

Buyers also found that their leaseholds had been sold onto investment companies. Instead of being able to buy them after a couple of years for a few thousand pounds, they were being asked for tens of thousands.

Campaign groups have sprung up demanding action, and in the spring Taylor Wimpey announced it would pay £130m to alter the terms of doubling leases for some owners of newly built leasehold properties.

The government has now noticed the issue. Despite the Queen’s Speech being heavily dominated by Brexit, the issue of leasehold transparency was referenced. The speech included: “We will consult and look to take action to promote transparency and fairness for leaseholders.

“We will look at the sale of leasehold houses and onerous ground rents, working with property developers, the Competition and Markets Authority and others.”

However, this was put forward as an aim and not detailed as part of any particular bill. It does show, however, that alleviating buyer concerns is back on the government’s agenda.

Consumer confusion

The Home Owners Alliance (HOA) has warned that the issue of leasehold properties is exacerbating the country’s home-ownership crisis. In fact, it has issued a strongly worded statement accusing the sector of “widespread malpractice and lack of consumer understanding”.

Whether it could be regarded as malpractice or not, there is certainly no doubt about the consumer confusion. HOA research shows that just 58 per cent of leaseholders questioned said they knew the length of their current lease, and almost a quarter of these said it was less than 80 years: widely seen as the number at which the lease begins to harm the property’s value, and so its “mortgageability”.

What’s more, property listings often don’t offer information on the tenure of the homes for sale. In fact, less than half of those surveyed actually specified whether a home was freehold or leasehold. And only a quarter of the listings specified the amount of time left on the lease.

Paula Higgins, head of the HOA, said: “Unscrupulous and avaricious actors within the property industry are using sharp leasehold practices to line their own pockets and fleece householders.”

She added: “Developers and estate management companies rely on leasehold to bamboozle consumers, charge exorbitant administration fees, ever increasing ground rents and render properties unsellable.

“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. The government needs to take urgent legislative action to protect people from these practices, help people who are already trapped and avert a full-blown crisis.”

One potential benefit of the scandals, the extension prices and the baffled buyers trapped in a home they apparently own but pay rent on: more people are reading up on leaseholds and their limitations.

At the very least, developers are facing greater scrutiny of their leasehold practises – from government, from campaigners and from buyers themselves.