Advice about leasehold ground rent - seems expensive!

CloudyRobot2023

Hi all

We are currently in the process of downsizing our house and have put an offer in for a leasehold property. Now that the lease has come back from the solicitors we have a few queries (we've never bought a leasehold before so excuse the ignorance) as below.

1) The lease has 994 years left to run, which is a good thing, but the ground rent is £500 pa, all surrounding properties are freehold and this lease started in 2018, the current owner appears to have sold the freehold to a third party. This is a worry although our solicitor has advised we may be able to extend the lease in two years resulting in a peppercorn rent. We're guessing that the owner has sold the freehold, or borrowed money against it, and we'll be left with an overly inflated ground rent for his debt. (There is no provision in the lease for the ground rent rising, so that's one good thing).

My questions on point 1 are a) would a £500 ground rent on a property worth under 100k put you off buying it b) how easy is it to extend the lease in 2 years and reduce it to a peppercorn rent and c) if we were unable to reduce the ground rent would this make the property virtually unsellable as it's classed as an assured shorthold tenancy?

2) The lease states that the property must be insured in both ours and the leaseholder's names. Is this normal?

3) Some of the Tenant Covenants seem overly restrictive such as not to make any internal non structural changes without the landlord's permission, are these normal and if the landlord decided we had broken a covenant could he decide to take back the property for non compliance as it classes as an assured shorthold tenancy? It honestly sounds like we're buying a house but then living as if we're renting it?

4) The lease refers to a premium of £19000, sorry but what does this mean?

Thanks in advance for any replies and sorry if this all sounds a little ignorant, we have asked the solicitor the same questions but they're not the best at communicating and we're after making a decision!

Thanks

JM68

This sounds similar to the recent leasehold scandal issue on new build houses i.e. freehold sold off, very high ground rents, need permission for everything (which they no doubt will charge you a huge amount for the 'admin' of granting).

Think the Government is/will be doing something to improve the situation for leaseholders.  But personally I would have alarm bells ringing and never buy something like that.

Yes, in theory, you can apply to extend lease and change ground rent a peppercorn after 2 years.  But you will have to pay a premium (mostly for loss for loss of ground rent - probably around £8500) plus yours and their legal and surveyor) costs  They may also drag it out through the tribunal etc.  Plus that would not change any terms of the lease e.g. permission to do this or that and 'admin' charges for that.

eddddy

CloudyRobot2023 said:

1) The lease has 994 years left to run, which is a good thing, but the ground rent is £500 pa, all surrounding properties are freehold and this lease started in 2018, the current owner appears to have sold the freehold to a third party. This is a worry although our solicitor has advised we may be able to extend the lease in two years resulting in a peppercorn rent. We're guessing that the owner has sold the freehold, or borrowed money against it, and we'll be left with an overly inflated ground rent for his debt. (There is no provision in the lease for the ground rent rising, so that's one good thing).

When you say "property" - I assume you mean a house (not a flat or maisonette).

You say you think that somebody bought a freehold house, and then sold the freehold and leased the house back. Tbh, I think that's extremely unlikely - for many reasons. (I could explain the reasons, but it would turn into a long essay.)

More likely, the developer started off by selling leasehold houses (like the one you're looking at), then there was a big outcry about 'greedy' developers mis-selling leasehold houses, so nobody would buy leasehold houses. So the developer switched over to selling them freehold.


Why is your solicitor suggesting that you extend the lease? The more normal thing to do would be to buy the freehold.

And if you want to buy the freehold (or extend the lease), you can ask the seller to start the process, and then you can complete it after the purchase. That way you don't have to wait 2 years.


Buying the freehold might cost around £7k to £9k - and maybe the fees would be £2k to £3k.

So if you offer £10k to £15k less than you would for a freehold house, you should be OK. 

badmemory

I would be concerned.  Are all the neighbours truly freehold if so I would be wondering why the property you are interested in is not.  If it is down to the current owner of the property then I would be wondering what else that person has done that will affect the property.  But then I am well known for being just a touch untrusting.

LegallyLandlord

It is very odd. Avoid leasehold properties if at all possible. £500 is a ridiculous amount for ground rent, and you get nothing in return. 

Is it capped at £500?

there is an argument that leases with ground rent over £250 outside of London are treated as assured shorthold tenancies. This means if you miss payments, the freeholder could forfeit the lease. 

This bizarre quirk may well be dealt with in the coming renters’ reform bill, but it’s a risk. 

At a time when it’s a buyer’s market, I’d advise playing safe and avoiding this sort of thing 

eddddy

LegallyLandlord said:

It is very odd. Avoid leasehold properties if at all possible. £500 is a ridiculous amount for ground rent, and you get nothing in return. 

If you like the leasehold house, and the freehold can be bought for, say, £10k to £12k - where's the problem in offering £12k to £15k less than the 'normal' freehold value?

(Or even take a punt, and offer £15k to £20k below the freehold value.)


The 'leasehold scandal' was essentially that developers sold leasehold houses to people with high ground rents without explaining that they would have to pay an extra £10k (or £30k or £50k or £80k) to buy the freehold.

(For example, one developer told a buyer that the freehold would cost £2k before they bought. After they bought, they found out it the freehold would really cost £40k. They wouldn't have bought, if they'd known that.)


If the OP checks with a valuer, and makes an offer knowing that the freehold would cost £10k to £12k (or whatever) on top - I don't really see a problem.


(There may be separate issues like estate management fees for looking after communal spaces. But that's nothing to do with the difference between leasehold and freehold.)

user1977

Quite - you don't really get "nothing in return", you get what ought to be a lower price to reflect the rent you'll be paying.

loubel

The rules for lease extensions and buying freeholds are different for houses than flats so do make sure you are getting the correct information. Your solicitor may not be experienced specifically with the procedures for leasehold houses as they are much less common.

Are you getting a mortgage? Lots of lenders have maximum ground rents of 0.1-0.2 % property value so it might not be mortgageable with such a high rent. I'd definitely do some research there before proceeding too far and I'd certainly be wanting to know why the seller hasn't already bought the freehold.

Adly812

You could ask the seller to serve a section 42 to extend the lease and then pass the rights over to your self to continue the process. That negates the need to wait two years. However if you have a mortgage then most likely the lender would want the extension to be done before releasing the mortgage.

what are the service charges and the ground Rent review terms and periods ?

A GR above £250 outside of London is classed as an ast and you might need an indemnity policy if you’re looking at a mortgage. It will cover the lenders risk but not yours.

your best bet is to either get a lease extension done to reduce the Gr to a peppercorn and add another 90 years.

all properties that come with a lease have bizarrely different terms and conditions and most are very restrictive. 

If you are bound by your budget to purchasing a leasehold I would look at one with a zero ground rent. This property needs an extension before being desirable 

eddddy

Adly812 said:

You could ask the seller to serve a section 42 to extend the lease and then pass the rights over to your self to continue the process. That negates the need to wait two years. However if you have a mortgage then most likely the lender would want the extension to be done before releasing the mortgage.

what are the service charges and the ground Rent review terms and periods ?

A GR above £250 outside of London is classed as an ast and you might need an indemnity policy if you’re looking at a mortgage. It will cover the lenders risk but not yours.

your best bet is to either get a lease extension done to reduce the Gr to a peppercorn and add another 90 years.

all properties that come with a lease have bizarrely different terms and conditions and most are very restrictive. 

If you are bound by your budget to purchasing a leasehold I would look at one with a zero ground rent. This property needs an extension before being desirable 

I think you've missed a few key points.

• The OP is talking about a house - you seem to be talking about extending the lease for a flat.

• The lease has 994 years remaining - so the mortgage lender won't have a problem with lease length.

• So there's no reason for the OP to extend the lease. But perhaps the OP wants to consider buying the freehold.

• The OP says "There is no provision in the lease for the ground rent rising"

The freehold might cost around £10k to £12k including fees - but the OP should confirm that with a valuer.

If the OP is concerned about the AST/Housing Act situation, they have the option of asking the seller to start the statutory process for buying the freehold.


However, a number of mortgage lenders might be concerned about the ground rent being over 0.5% of the property's value. So that might be quite a big problem.