An industry figure has advised that leasehold homeowners with onerous contract terms should exercise their rights under the Leasehold Reform Act.
A key issue highlighted in the government’s housing white paper, bad ground rent terms attached to leasehold properties have been leaving owners with property which was almost impossible to sell. Terms including the doubling of rent every decade led many to try and purchase the freehold of their property, despite being unaware of the potential risks involved.
Suggesting that these leaseholders first look to legislation was Louie Burns. The Managing Director of Leasehold Solutions highlighted the dual ways of purchasing the freehold and advised which one homeowners should opt for.
“There are two different ways to buy the freehold of your home. Firstly, leaseholders have the legal right to buy their freehold under the Leasehold Reform Act (1967). Here there is a legal process to follow, with a statutory valuation method set down by law.
“If the freeholder will not agree to negotiate fairly, homeowners have a legal right to force them to and are offered legal protection on the terms of the freehold purchase. To many people, this process may seem daunting and uncertain, and understandably people shy away from it.
“The other option is to contact the freeholder directly and ask them how much they want to sell the freehold. This is called an ‘informal’ deal and it is often the worst decision that a leaseholder could possibly make because to do so means they have no legal protection whatsoever under statutory legislation. This is one instance where ‘no deal’ really is better than a bad deal.”
Originally enacted to provide leaseholders with legal safeguards, the Leasehold Reform Act was also designed to compel the freeholder to engage in fair negotiation during freehold purchase.
Where negotiations and purchase take place informally, the leaseholder is no longer protected by this legislation. There will be no way for the leaseholder to change the terms offered, should they accept them.
Commenting on the dangers of informal arrangements, Burns went on to say: “We regularly see freeholders asking for up to 50 times the current ground rent on the property, which can be double or sometimes even triple what the valuation would be using the statutory method. We regularly see people who have bought their freeholds informally and paid up to £25,000 more than they should have done, simply because they accepted an informal agreement.
“In addition, an informal deal often won’t remove some of the costly terms that can be included in the lease, meaning homeowners will continue to pay fees to the freeholder for permission to alter their own homes, even after they have purchased the freehold.
“Some of the clauses we have seen retained are costs of £300 per room for permission to change the carpet, thousands of pounds for licences to carry out DIY, £4,500 to build a conservatory, and even £107 to install a blind over a kitchen window!”
Despite some freeholders stating that they would amend ground rent terms to link to the inflation rate, Burns warns that this may not be as positive as one might assume.
“The deals we have seen are not good at all, as in most cases the freeholder wants to double the ground rent before they link it to RPI (Retail Price Index) on an ongoing basis, which means most ground rents would rise to around £590 per year linked to RPI for the remainder of the lease. Furthermore, many freeholders are asking for fees of up to £15,000 to transfer doubling ground rents to ones linked to RPI, which is simply outrageous.”
He also drew attention to the difficulties which leaseholders may face in the future, especially if they ever wanted to sell the property.
“Leaseholders who accept deals of this sort are accepting an onerous ground rent clause for evermore, which might give them serious problems should they try to sell their home. In addition, the same fees for licences and permissions will be included in the terms of the new lease, and if they wish to purchase the freehold at a later date then it will still cost many thousands of pounds, whether they use the informal or statutory route.”
Although acknowledging the attraction of the informal option, Burns concludes by stressing the importance of taking the statutory route.
“I fully understand why the informal option can appear to be easier; freeholders are very good at making informal deals look attractive and hassle-free, largely because they don’t want to lose the valuable income for ground rents and permissions. However, I urge leaseholders to avoid informal offers like the plague.
“The only sensible option is to use the statutory legal process, which is there to protect leaseholders, and will enable them to buy the freehold, remove onerous ground rents and costs for permissions, and take back control of their property for good.”
