Buyers of new build leasehold properties need to ensure they are not letting themselves in for a huge financial burden which may make it difficult to sell their house on in the future, warns property specialist Liz Brady, a Partner at leading South East law firm Furley Page.
It is a long established practice for homes to have long leaseholds – about 20% of private homes in England have them – but over the past 10 years house building developers have created more leasehold housing estates.
Liz explains that rather than levy the “peppercorn” ground rents common for centuries on long leases, some developers are increasing them considerably over the period of the lease.
More worrying is that if a leasehold owner of a house wishes, for example, to acquire the freehold interest in their house some years later to make it more attractive for sale, the landlord may charge a prohibitively high price for such freehold purchase because the price will reflect the loss to the landlord of the future ground rent income.
Liz says: “We are seeing ground rents in long leases which double, say, every five years. The reason for this trend for developers to have high or increasing ground rents has nothing to do with the law but is driven by the developer’s desire to create another source of income and thereby create an investment asset for the landlord/developer.”
She says purchasers need to fully understand the arrangements they are entering into and should seek professional advice. However, the good news is that other parts of the property sector are now seeking to rein in the worst cases of uncapped ground rents.
“The outcry over uncapped ground rents has caused one large developer to apologise to its leaseholders and acknowledge that it will try to rectify the situation.
“Some lenders have added their voices expressing concern. Nationwide has taken steps to protect its mortgage members from escalating ground rents with a new valuation policy for new build leasehold properties. It is the first major lender to impose fairer lending conditions on these homes. The maximum acceptable starting ground rent on all new build leasehold properties will be limited to 0.1% of the property’s value.
“If the valuer believes that the marketability of the property would be severely affected by unreasonable lease terms, Nationwide may decline to lend on the property, or reflect those terms in the valuation figure they provide to the lender.”
She said that other banks and building societies will no doubt follow suit, and adds: “It is advisable for potential purchasers of new build leasehold properties to be fully aware of this issue before they proceed.”
Liz Brady has extensive experience of advising clients on a range of property transactions and is a member of the Commercial Real Estate Legal Association and the Kent Law Society.
For more information and advice on property issues contact Liz Brady by email at firstname.lastname@example.org or call 01227 763939
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