Thursday, 16 March 2017

Beware the leasehold property trap

I’ve written in the past that I prefer freehold properties to leasehold properties. Ground rent payments, service charges and the cost to extend the lease and/or buy the freehold, soon adds up.

I highlighted a one bedroom flat for sale in Chichester to my e-newsletter readers last week. On first sight, priced at £160,000 and achieving £700pcm, it offers a very decent 5.3% rental yield.

Except there is a £650(!) per year ground rent charge along with another £550 in maintenance, insurance and electricity charges for the block. That £1,200 per year compulsory charge (hidden away in the lease) sees the rental yield drop to just 4.5% - which is pretty average for Chichester.

And that’s before having to periodically pay to extend the lease or see the value of the property collapse. At 42 years old, the Chichester flat had ‘just’ 57 years left - making the flat unmortgageable.

One thing to point out is that whilst ‘leasehold’ traditionally meant an apartment, in recent years’ houses on new-build sites frequently fall into this ownership type too.

Sometimes this is due to the landowner’s preference (such as many of the houses built on Goodwood land) and sometimes the builder is setting themselves up for financial gain - either via the ground rent payments or by selling the freehold to an external company.

And whilst some new-build houses come with ‘virtually freehold 999 year leases’, there is a trap for the unwary.

Imagine a clause in the lease that says you have to pay £200 per year in ground rent. Sounds reasonable? But what if it says this charge will double every ten years. Pretty harmless? Well in fifty years’ time the ground rent would be £6,400 each year! And another fifty years after that (when perhaps your great grandchildren will own it) there will be a compulsory £204,800 to pay each year!!!

I don’t know what inflation will do by then but I certainly wouldn’t want that obligation around my neck.

And solicitors are starting to wise up to this and warn off potential buyers when they see such clauses in a lease - particularly when dealing with traditionally freehold houses.

Such clauses also mean that when the time comes to extend the lease the ‘marriage value’ will be higher than normal.

There have been reports in the media that owners of fairly new houses are being charged thousands of pounds for permission to make alterations to their home, such as adding a conservatory. The alternative is to pay tens of thousands to buy the freehold - or be held to ransom with a property that may become nearly impossible to sell.

As ever, make sure you read the small print and crunch the numbers! And if you’re thinking of buying a buy-to-let property and would like some help with this, please give me a call.

 (This article was featured in the Chichester Observer's property section on 16th March 2017) 

Clive Janes, CRJ Lettings.


If you are looking for an agent that is well-establishedprofessional and communicative in Chichester, then contact us to find out how we can get the best out of your investment property.

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