My leasehold property nightmare
If you're thinking of buying a leasehold property, read this before you buy! It could save you tens of thousands of pounds...
Three years ago, my husband and I bought a leasehold flat in North London. It had 73 years left on the lease. This fact cost us two years’ of heartache – and £20,000 (adding almost 7% to the cost of buying the property).
Yet, if I had bought the flat just seven years earlier, my costs would have been less than half that sum.
Confused? The rules for leasehold properties are complex so if you’re thinking of buying a leasehold property, read this before you buy! It could save you tens of thousands of pounds...
Leasehold vs freehold property
Most flats in this country are leasehold properties, while most houses are freehold properties.
The main difference is that, with a leasehold property, even though you’ve bought the property and have a mortgage bill to show for it every month, you still have a landlord: the freeholder.
The freeholder owns the land the property is built on, which means you, as a leaseholder, have to pay ‘ground rent’. What’s more, your ownership of the property is limited to a set period of time (the lease). Once the lease expires, the property reverts ‘back’ to being a freehold property, where both the building and the land it is on are under the ownership of the freeholder.
So if you have a 70 year lease today, even if you pay your mortgage off and eventually own your property outright, in March 2080, the freeholder will suddenly be able to take ownership of your flat. And you will have no legal rights at all.
Crazy, right? Yet, believe it or not, that’s not the worst of it.
In their role as ‘landlord’, the freeholder is responsible for making sure the common areas of the property (eg the communal entrance and corridors, the roof, the path to the front door) are maintained in a good state of repair and the building itself is insured against fire, destruction and damage.
This doesn’t cost the freeholder anything. Each leasehold flat in the building contributes to a pot, which the freeholder then uses to pay these costs. The leaseholders also have to pay the freeholder for the cost of gathering and administering this pot of money. If you fall behind with your payments, as well as taking you to court in the usual way, the freeholder can prevent you from either selling your property or remortgaging until you pay up.
Unfortunately, this system is wide open to abuse. Freeholders are totally unregulated and can make huge amounts of money from the so-called ‘service’ they force upon leaseholders. Often they do this by employing companies they own or get kickbacks from to carry out the maintenance work and provide insurance – effectively paying themselves. There are no checks and balances to ensure they are acting in the best interests of the building.
My freeholder charged me £2,100 for a completely rubbish buildings insurance policy one year – 300% more than the very best policy should have cost. When I complained, the message was: I could count myself lucky there was no other service charge. Of course, the building wasn’t being maintained as result and hadn’t been for years.
But that’s not all. Oh no.
The price of peace of mind
To make any changes to the structure of the leasehold property – even knocking down an internal wall, never mind building an extension – leaseholders need to get the permission of the freeholder. And for this, most freeholders will charge you thousands and thousands of pounds as a ‘fee’ for their time. Effectively, they can hold you to ransom.
I wanted to extend my flat, so once I realised my freeholder was going to behave in this way, I decided I would do anything to get him out of my life. I had a mortgage, I was sick of having a landlord as well!
The good news is, as leaseholders, you do have three key legal rights of ownership:
1) you have the right to extend the lease of your property once you have lived there for two years.
2) If the majority of leaseholders in the building get together, you can collectively exercise your ‘right to manage’ – i.e. to appoint new managing agents. This will stop excessive service charges from being levied.
3) Again, if the majority of the leaseholders get together, you can collectively force the freeholder to sell you the property – and thus exorcise him/her from your lives completely! Each flat then owns a ‘share of freehold’. You manage the maintenance and insurance of the building yourselves, and there is no need to ever again renew the lease.
Needless to say, I opted for number three, known as ‘collective enfranchisement’. Unfortunately, it cost me most of my life savings.
In my case, the freeholder had bought the freehold of our building (a three-storey converted Victorian house) at an auction in the early 1980s for a few hundred pounds. In 2010, I clubbed together with the owners of the other two flats in the building to buy it off him for £42,000 – plus we had to pay his legal fees and expenses, as well as our own (around £9,000 in total).
Why did it cost so much? Because, as well as compensation for 73 years of lost ground rent, the freeholder had the right to demand a half of what’s called the ‘marriage value’ of the flat.
The marriage value is the difference in price between what the flat is worth as a leasehold property, and what it would be worth if it was a freehold property (when the building has been ‘married’ up with the land).
In my case, the marriageable value was deemed to be around £34,000, so I had to pay the freeholder £17,000, plus £3,000 in legal and survey fees. It was a very time-consuming process, with the freeholder forced to agree to sell to us eventually but able to drag out the process and take almost a year to agree to the price set by the independent surveyor. (Find out more about the process.)
Yet as I mentioned at the start, if I had bought the flat just seven years earlier, my costs would have been less than half that sum. Why? Because – and this is really important to note - freeholders are only entitled to a share of the marriage value of the flat once the lease dips below 80 years. (Use this calculator to see how dramatically this rule affects the costs of buying a lease.)
Ridiculous system that needs reform
In my opinion, leasehold/freehold property law is in dire need of reform and regulation. The freeholder has far too much power over the leaseholders, and it’s far too difficult (because you need the majority of leaseholders to club together) and expensive (because leaseholders bear all the costs) to force a freeholder to behave reasonably.
I was lucky, because as well as my own savings, I had two neighbours who had tens of thousands of pounds lying around in their bank accounts and understood the necessity to spend it on something as fun as a share of the freehold.
Many leaseholders are not that lucky – and simply have to put up and shut up.
Where to go to get help
Or do you? The Leasehold Advisory Service is a fantastic, free Government resource leaseholders can use to get help and advice. Their telephone number is 020 7383 9800 or you can write to them using their online enquiry form.
Tell us about your experiences
That was my leasehold property nightmare – what’s yours? Or have you experienced the other side of the coin, as a landlord freeholder? Do you think we should reform the system? Would you buy a leasehold property after reading this?
Let me know your thoughts using the comments box below!