I need a bit of advice regarding FTB and Leasehold/Freehold

Natztastic2

Hello everyone,

We have a dilemma. We are currently purchasing a property that is shared ownership. We are so far along (we should be moving in this week) however we have hit a snag.

Whilst we were going through the contract with the solicitor she has pointed something out to us that she didn't think we correct. There is 2 different contracts, 1 says we can staircase to 100% and buy the freehold for the property. The other says we can staircase o 100% but it will always be leasehold. This is a 125 year contract.

This is being debated at the moment to and from the various law firms.

Please can someone tell me the major pitfalls to this if it will always be leasehold. If we decide to move and sell in 10 years, will it affect us? Does it affect resell value? Is it stupid not to buy the house anyway as its the house we've always wanted?

We also want to move in ASAP, so don't have much time to consider.

Thanks in advance

WiseOwl00

I don't have much knowledge on shared ownership, so hopefully someone who knows more will come along.

I'll be honest, there are some implications to buying a leasehold property. So leasehold basically means that you do not own the land that the house is built on, even if you own 100% of the house. The freeholder, who is the person who owns the land, basically rents the land out to the leaseholder, who would be the person who owns the house. This typically starts out as a contracted number of years - some older houses have up to 999 years, whilst new builds and shared ownership properties tend to be around 125 years. All shared ownership properties start out as leasehold by default, they cannot be freehold. Once the lease expires, the land and the property, both revert back to being the ownership of the freeholder. So essentially you don't want the lease to ever expire.

Usually a leaseholder has the right to either extend or buy the leasehold (to make the house freehold) to avoid this problem - this costs money + requires legal advice. However, people who are buying shared ownership properties do not have the right to extend or buy the leasehold. I think they do get this right when they own 100% of the property, but you'd have to double check this as I'm not sure. The problem is, when a leasehold contract drops below 80 years it essentially becomes a short leasehold. Once it is <80 years, extending the leasehold is subject to something called marriage value which essentially increases the cost massively (can be thousands to extend). People are very unlikely to buy a house <80 years as they 1) they know they will face major costs trying to extend the leasehold, and 2) they will struggle to get a mortgage as banks will not lend when a leasehold has a certain number of years left. Houses also devalue as the lease falls <80 years. The thing is, when you own a shared ownership property, you don't have the right to extend so if you don't buy 100% of the house in the next 55 years you might end up in this situation. I think some shared ownership freeholders will allow extension of the lease, if the leaseholder doesn't own 100% of the property, when <80 years but this is obviously not guaranteed and would be very expensive.  

There is also some stigma with buying a leasehold property as you don't own the land, have to pay ground rent, are subject to their restrictions/rules, and have issues if the lease gets close to expiry. When I was viewing houses, I excluded all leaseholds but that might just be my opinion and I know people who do live in them + don't have any problems. Obviously all shared ownership properties are leasehold by default so you won't be able to find a freehold alternative down the shared ownership route. If you're planning to sell in 10 years then there'd still be 115 years on the lease which shouldn't create a problem. If you buy 100% of the property then I believe you should be able to buy or extend the leasehold, but again it'd be worth checking with someone who knows more about shared ownership and it will likely depend on the freeholder. 

I'd recommend having a google about the difference between freehold and leasehold - there's a lot of information out there - so you have an idea. Make sure your solicitor clarifies if you automatically get the freehold once you reach 100%, or whether it'd still be leasehold, and that this is in your contract. If it will be leasehold, see if you can find out who the freeholder is and whether you'd be able to buy it at 100%.  

Natztastic2

WiseOwl00 said:

I don't have much knowledge on shared ownership, so hopefully someone who knows more will come along.

I'll be honest, there are some implications to buying a leasehold property. So leasehold basically means that you do not own the land that the house is built on, even if you own 100% of the house. The freeholder, who is the person who owns the land, basically rents the land out to the leaseholder, who would be the person who owns the house. This typically starts out as a contracted number of years - some older houses have up to 999 years, whilst new builds and shared ownership properties tend to be around 125 years. All shared ownership properties start out as leasehold by default, they cannot be freehold. Once the lease expires, the land and the property, both revert back to being the ownership of the freeholder. So essentially you don't want the lease to ever expire.

Usually a leaseholder has the right to either extend or buy the leasehold (to make the house freehold) to avoid this problem - this costs money + requires legal advice. However, people who are buying shared ownership properties do not have the right to extend or buy the leasehold. I think they do get this right when they own 100% of the property, but you'd have to double check this as I'm not sure. The problem is, when a leasehold contract drops below 80 years it essentially becomes a short leasehold. Once it is <80 years, extending the leasehold is subject to something called marriage value which essentially increases the cost massively (can be thousands to extend). People are very unlikely to buy a house <80 years as they 1) they know they will face major costs trying to extend the leasehold, and 2) they will struggle to get a mortgage as banks will not lend when a leasehold has a certain number of years left. Houses also devalue as the lease falls <80 years. The thing is, when you own a shared ownership property, you don't have the right to extend so if you don't buy 100% of the house in the next 55 years you might end up in this situation. I think some shared ownership freeholders will allow extension of the lease, if the leaseholder doesn't own 100% of the property, when <80 years but this is obviously not guaranteed and would be very expensive.  

There is also some stigma with buying a leasehold property as you don't own the land, have to pay ground rent, are subject to their restrictions/rules, and have issues if the lease gets close to expiry. When I was viewing houses, I excluded all leaseholds but that might just be my opinion and I know people who do live in them + don't have any problems. Obviously all shared ownership properties are leasehold by default so you won't be able to find a freehold alternative down the shared ownership route. If you're planning to sell in 10 years then there'd still be 115 years on the lease which shouldn't create a problem. If you buy 100% of the property then I believe you should be able to buy or extend the leasehold, but again it'd be worth checking with someone who knows more about shared ownership and it will likely depend on the freeholder. 

I'd recommend having a google about the difference between freehold and leasehold - there's a lot of information out there - so you have an idea. Make sure your solicitor clarifies if you automatically get the freehold once you reach 100%, or whether it'd still be leasehold, and that this is in your contract. If it will be leasehold, see if you can find out who the freeholder is and whether you'd be able to buy it at 100%.  

Thank you so much for taking the time to write such an in-depth reply.

It was really helpful for you to explain everything, I now understand the whole situation better.

I think we need to decide if we are in this for the long or short-haul and go from there (or we get good news tomorrow about our situation!)

Thanks again

davidmcn

I don't understand why there are two different contracts though - you (generally) don't get to choose.

Natztastic2

davidmcn said:

I don't understand why there are two different contracts though - you (generally) don't get to choose.

Hmm yes I don't think there actually is 2 contracts. I believe (but don't know enough about it to know if I am correct) the clause is something to do with the district council rule, whereas the housing association rules say otherwise.

alt80

Is it a new build (or fairly recently built) maisonette by any chance? I've seen this a few times.

WiseOwl's post was pretty comprehensive for more info go to The Leasehold Advisory Service.

If the service charge is stupid it will affect the future value / saleability of the property also. Please keep in mind the HA is very likely to have right of first refusal on the property when you want to move on.