"Ground rent will be reduced to a ‘peppercorn’ rent under the new reform. This means that the ground rent cannot exceed the value of one peppercorn per year, meaning that ground rent is now of no value and the leaseholder will not have to pay it"
Leaseholds are changing in 2024. The Land Registry is introducing a reform to the current leasehold system in their 2022+ Strategy. This will focus on making the purchase and sale of property much easier by enabling the entire process to be completed and providing accessible and real-time data on properties throughout the UK.
Alongside this, there will be a leasehold reform to make buying a leasehold, easier, cheaper, and more transparent to the leaseholder. This reform will diminish the drawbacks and enhance the benefits that come with a leasehold and will make buying a leasehold property a better option for first-time buyers.
Experts at Compare My Move have put together a report on what the leasehold reform will mean for first-time buyers, what the pros and cons of buying a leasehold as a first-time buyer are and what to look out for when buying a leasehold property.
What the Leasehold Reform will mean for first-time buyers
Transparency
The Land Registry want to make it easier for buyers to know exactly how much they will be paying in fees such as service charges, administration charges, and building insurance commission fees. Being surprised by these charges would often turn first-time buyers away from leasehold properties especially when you are buying your first property, budgeting is key. The reform will help first-time buyers know exactly what they need to spend on their properties with no surprises.
Peppercorn ground rent
Ground rent will be reduced to a ‘peppercorn’ rent under the new reform. This means that the ground rent cannot exceed the value of one peppercorn per year, meaning that ground rent is now of no value and the leaseholder will not have to pay it. The average ground rent for a leasehold property is around £300 per year and can rise to £1000 in some places, not only making the monthly cost of a lease more but affecting the price of a lease extension.
Easier and cheaper lease extensions
Extending a lease on a leasehold can be very expensive in the current system, and will often deter buyers. However, different changes in the legislation will have significant changes in the price and the ease of extending a lease. Currently, the statutory lease extension for flats is 90 years, and for houses is 50 years but under the new legislation, this statutory lease extension will be 990 years across houses and flats. Meaning that the majority of leasehold owners will not have to extend their lease.
If you do have to extend your lease, under current legislation you will have to be living at the property for 2 years before you can do so, which could see leasehold extension costs rise significantly by the time you can extend it. Under new legislation, however, you will not have to wait and can do so as soon as the property is bought.
Having a peppercorn ground rent will also make the leasehold extension significantly cheaper, Compare My Move’s leasehold extension calculator has found that the average leasehold owner with 100 years left on their lease will be paying just under £5,000 (£4,952) less when extending.
Pros of living in a leasehold property
Usually cheaper
The average price of flats in the UK is just under £75,000 cheaper than the average price of houses. This means that leaseholds are on average cheaper than freeholds, as there are only a minority of houses in the UK that are leasehold. It must be noted that because of the nature of leasehold properties, being flats and apartments, they are usually smaller than other properties.
Availability in populated areas
Because leasehold properties are typically smaller, they can be packed into cities and more populated areas without having to bump up the price too much as apartments and flats can be stacked on top of each other. Being in the city can be perfect for a first-time buyer who wants a property close to amenities and jobs. Properties in cities are also less likely to diminish in value due to the location.
Less maintenance
A leasehold property is part of a larger property that a freeholder owns. While a lot of the internal maintenance such as appliances, plasterwork, floorboards, electrical, and plumbing will be the responsibility of the leaseholder there are maintenance issues that are the responsibility of the freeholder.
Issues such as the building structure, the cladding and the roof are the responsibility of the freeholder, therefore when you buy a leasehold property you will have less maintenance to undertake than if you were to own a freehold property.
Cons of living in a leasehold property
You may have to extend the lease
A leasehold property will have a lease, meaning that the property is only yours for a finite number of years before returning to the freeholder. This means that you may have to pay to extend the lease on your property, which will cost more depending on the amount of time left on your lease.
The more time you have on the lease the cheaper it will be to extend it, as a rule, the price of extending the lease rises significantly if your lease has less than 80 years left and it is advised that you should extend your lease around the 90-year mark at the latest.
Under current legislation, you have to be living in a leasehold property for at least 2 years before being allowed to extend the lease. When buying a property for the first time, you may have to put aside a large amount of money to extend this lease in future.
You may have to pay the Freeholder
The freeholder has responsibilities on the freehold property such as the maintenance of the structure of the property, this will require the leaseholder to pay service charges and, under current legislation, ground rent.
These service charges can differ depending on the freeholder and the work that’s being done on the property, however, the leaseholder has to be notified of any works that will cost the leaseholder over £250 a year or contractors that will cost the leaseholder over £100
What to know when purchasing a leasehold property as a first-time buyer
Length of lease
The length of the lease is crucial to know when buying a leasehold property as a first-time buyer, extending the lease could be an expense you have to keep in mind when buying your property.
For the average-priced flat (£190,200) with the average yearly ground rent (£298) it would cost roughly £6,278 to extend a lease that has 100 years left. However, if this lease drops to 79 years, this price almost doubles to £12,159. It’s important to use a lease extension calculator to work out how much you’ll need to spend when extending your lease before you decide to buy a leasehold property.
Service charges
If there is maintenance or a service such as a concierge or on-site amenities that are on the freehold premises then you will likely have to pay a service charge or a yearly maintenance fee to the freeholder. These fees should be stated in your leasehold agreement and you should know of any additional charges before buying the leasehold property.
For any additional fees that need to be implemented throughout the year on any specialised maintenance work, your freeholder should inform you of the charges well in advance, although the freeholder isn’t required to find the cheapest contractor or building work, they are responsible for ensuring that the costs incurred are reasonable.
In regards to whether you can challenge a service charge, Lawcomm Solicitors states that:
“You are entitled to request invoices evidencing the costs incurred during any service charge period to enable you to obtain equivalent estimates and assess whether you are getting value for money.
“If you are ultimately unhappy with the charges levied, you can make an application to the First Tier Tribunal for a determination as to their reasonableness.”
Ground rent
Under current legislation, ground rent will have to be taken into account when purchasing a leasehold property. The ground rent is paid annually and will depend on the property and the location, ground rent outside of London shouldn’t be over £500 a year (£1000 a year in London). However, with the new legislation which will start on the 30th of June 2024, ground rent shouldn’t be more than a peppercorn rent per year (nothing more than the value of a single peppercorn).
First-time buyers should know exactly what they are paying annually in ground rent before purchasing a property. Ground rent will also have an impact on the cost of the lease extension if you need to extend the lease, the higher the ground rent, the more expensive the lease extension will be. You will have a chance to negotiate your ground rent with your freeholder when extending a lease.
