Advisers must beware leasehold ‘minefield’

16 Apr 2018

One word that stood out among the varying issues impacting the mortgage market last year, and invariably not for good reasons, was leasehold.

The issue of leasehold new-build houses, and in particular clauses such as escalating ground rents and extortionate freehold costs, generated such a media storm that the government introduced legislation banning developers from building such properties in the future.

That said, we’ve yet to see any further moves which might help those who are already being dubbed leasehold prisoners.

Those owners who bought under such dubious leasehold terms find themselves not only struggling to remortgage their properties but are also within the eye of the storm when it comes to wanting to sell their homes.

Countless cases have been revealed where people feel they are stuck on a standard variable rate (SVR) or are simply trapped in their property because lenders are unwilling to lend to buyers on these properties, unless a freehold can be bought or such leasehold clauses are removed.

Plenty of pressure is being brought on the government to tackle these issues on behalf of existing leaseholders, who might have been completely unaware they were buying a leasehold house in the first place or that the terms of their lease were so onerous.

 

Adviser minefield

There is the significant issue of who owns the freehold, and whether the leaseholders are in any position to be able to buy it back.

Again, the standard practice in this position was for developers to sell on the freeholds to investment management companies and they have no inclination to sell these back cheaply.

There have been many examples where the freehold cost has gone up four or five-fold in the space of 12 months and it’s understandable that many people feel they cannot afford this.

For advisers too, this whole issue can be a veritable minefield when it comes to sorting out any finance on such properties.

Lenders are asking valuers to delve deep into such properties, their leases and the potentially onerous clauses.

If there is a belief the future market value of the property and its re-saleability will be impacted, then the lender will decline the case. Hence, the very difficult situation many borrowers/owners find themselves in.

 

1.4 million leaseholds

Not all lenders have a formal written policy on new-build leasehold property but the Nationwide Building Society does and it would be highly unusual for other lenders to look at these types of cases and differ greatly from what the Nationwide does.

So, for example, the Nationwide has a minimum acceptable lease term of 125 years for flats/250 years for houses, and ground rent must be ‘reasonable’ during any lease term.

To help advisers, Paradigm has produced a factsheet which gives an overview of the issues at hand, what impact this could potentially have on lending, and the next steps you should take with your clients.

There are 1.4 million leasehold houses across England so this is a very real issue for many homeowners.

Hopefully, the government will take action to make it cheaper and easier for existing leaseholders to buy out their freehold and assist in providing better information about redress for those consumers who face the most onerous terms.

 

In the dark

A key problem has been a lack of information and getting to the bottom of what terms there are in leases so advisers should also be prepared to find that clients might not be in possession of all the information about a particular property.

There has been plenty of noise about getting this information provided to all parties, upfront, without the need for potential buyers to go digging for it.

The sooner this type of Property Log Book – as espoused by the Conveyancing Association – happens, the better for all concerned.

Bob Hunt

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