Partner Katja Wigham, in our Commercial Property team, reviews the plans to ban leasehold on new build houses.
The BBC has published an article in relation to plans by Communities Secretary Sajid Javid to ban leasehold on new build houses, with Mr Javid saying: “Enough is enough. These practices are unjust, unnecessary and need to stop”.
Flats are leasehold, which effectively means flat owners own their flat for a fixed number of years, subject to rights in favour of “qualifying tenants” to extend the term of their lease and to dispense with the ground rent in return for a premium. There are also collective rights to acquire the freehold if there are a sufficient number of “qualifying tenants” and provided enough of them wish to participate, as well as pre-emption rights in certain circumstances if the freeholder wishes to dispose of the freehold.
Contrary to flats, houses are usually freehold, meaning the property (and the land it is on) is owned outright, subject to any mortgages as may apply. Leasehold houses are relatively unusual, but not unheard of. Owners of leasehold houses have the right, or will acquire the right over time, to buy the freehold or to extend their lease in return for a premium.
Whilst we agree houses tend to be sold off freehold, it is arguably unfair to apportion all blame regarding a leasehold transaction to the developers, provided it is made absolutely clear at the outset to the purchaser what the differences between freehold and leasehold are, and in the case of a leasehold transaction, exactly what lease terms the developer is offering.
The terms of the transaction should also be picked up at the valuation stage, and could have a positive impact on the purchase price, perhaps by bringing a leasehold transaction within the means of a purchaser who may not otherwise be able to afford the freehold at that time. The valuer will also need to satisfy the requirements of any lender. There is an argument that the developer may agree to retain some residual freehold by charging a ground rent, perhaps increasing by specified amounts at agreed intervals, so as to assist a buyer by effectively reducing the purchase price because the transaction is leasehold rather than freehold. It would then be open to the purchaser to assert his/her right to buy the freehold at a later date.
There are no doubt situations where a purchaser may not be aware of the implications of buying a leasehold house, with it coming as unexpected and perhaps unpleasant surprise further down the line that they will have to pay again to buy the freehold from the developer. The other side of the coin is that, provided both parties are fully aware at the outset as to the nature of the transaction, and of the implications associated with that, it is arguably fair that the parties should be free to make their own decisions and that transactions should be left to market forces.
Solicitors should also advise a purchaser on all aspects of the transaction, to include title, searches and replies to enquiries. We provide purchasers with a detailed report on title, which in the case of a leasehold transaction, would include a summary of the terms of the lease.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
