Leasehold agreements: opportunities or obstacles?

Part three – Obstacles

This September, our CEO Guy Horne is tackling the issue of leasehold properties. Through a series of posts, Guy will assess the misconceptions, opportunities and obstacles that come with leasehold agreements, and why they illicit such strong opinions.

In the third instalment of this blog series, I want to acknowledge the obstacles faced with leasehold agreements.

Leasehold contracts are usually synonymous with buying apartments in large blocks, yet are not always a good route for buy-to-let investors. Those looking to acquire apartments for the rental market have to abide by the freeholder’s rules, which can sometimes be detrimental to securing high rental yields. For example, restrictions such as “no student tenants allowed”, “no internal alterations” or “no letting on a room-by-room basis” could have unforeseen financial consequences for investors.

In leasehold agreements, the freeholder is also responsible for any continuous obligations, such as maintenance and repair work, buildings insurance or preserving communal areas. These additional costs can be passed onto the leaseholder through a service charge.

In some instances, leasehold terms can be very aggressive. For example, rent reviews containing doubling terms. Companies had previously issued a lease with a ground rent of £295 a year which doubled every 10 years. Consequently, in 50 years, the ground rent would have been £9,440 a year.

To combat this, Nationwide Building Society announced last year that it will no longer lend on new build properties with these lease terms, claiming that any rises should be inflationary linked only. They argued that the maximum acceptable starting ground rent would be limited to 0.1% of the property’s value.

The Law Commission is considering proposed changes to leasehold agreements. These include the leaseholder having the right to purchase unlimited extensions, and allowing them to make claims immediately. Currently, they have to wait a minimum of two years to request any amendments.

At HS Property Group, we are of the opinion that the market has room for improvement but it is important to note that leaseholds have existed as a tenure for hundreds of years. The leasehold market has functioned well for this period and will continue to do so for the foreseeable.