If you’re investing in a flat, apartment or new-build house, you may find that they are under leasehold ownership terms. If you decide to invest in a leasehold property there are some mistakes that it’s important to avoid. In this series we explore the common mistakes leasehold investors make and how you can avoid them. Our first article explains one of the most common leasehold property investment pitfalls; doubling ground rents.
Leasehold is a legal agreement whereby you own the property but not the land it resides upon. The land remains the ownership of the freeholder.
What are doubling ground rents?
Ground rent is an annual charge the leaseholder must pay to the freeholder. A leaseholder is in effect a tenant on the freeholder’s land, so the ground rent is in effect the tenancy.
Most ground rents are only around £50 per year, but some leasehold properties come with a clause in the lease allowing doubling ground rents. These clauses state that the ground rate payable by the leaseholder will double on fixed dates during the tenancy.
This can create extremely high rates by the end of a lease. For example, if a ground rent is initially £150 and doubles every 10 years, by years 121 – 125 of the lease it will have reached £614,400 per year. Not only is this costly for the leaseholder, it can make the property very difficult to sell.
How to avoid leasehold property investment pitfalls
In order to avoid being caught out by doubling ground rents, before you buy a property it’s important you check the contract carefully. If you want to use a mortgage to buy your property, don’t buy anything with a doubling ground rent as lenders won’t agree to a mortgage.
If you want to buy a property that has this in the contract, you can approach the seller to amend the clause to a fixed ground rent. The landlord may want a premium paid in return as compensation, but you can ask the seller to bear the cost.
If the contract cannot be amended there is still the option to exercise your legal rights. Under Section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, the leaseholder can serve a notice that exercises a statutory right to obtain a lease extension of 90 years, but which will reduce the ground rent to nothing.
It is important the seller services this notice before completion and then assigns it to you, as this right can only be exercised by someone who has held the lease for a minimum of two years. You must also ensure that the price you pay for the property reflects any costs you will incur in obtaining the lease extension following sale of the property.