In The Know: working with short leases and high ground rent

Nearly six in 10 leaseholders did not understand what it meant when they were buying their property, according to a report by NAEA Propertymark. The same report says that nearly half of leasehold homeowners were also unaware of escalating ground rent.

When you buy a freehold property, you own the ground, the building and the air above it for as long as you own the property. With a leasehold property, you buy the right to occupy the space for a period of time and, at the end of the lease, you have to hand the keys back. 

This is why a flat with a long lease is worth more than a flat with a short lease and, on a leasehold property, marriage value is the increase in the total value of the property after a lease extension. Under the Leasehold Reform, Housing and Urban Development Act 1993 a leaseholder has to effectively pay compensation to a freeholder is if the lease drops below 80 years and so when the lease is extended, the leaseholder has to share 50% of the increase in value with the freeholder, which could run into many thousands of pounds.

The length of the remaining lease is, therefore, a significant consideration when it comes to valuing a leasehold property, but it’s not the only consideration as leasehold properties also include a ground rent that is payable to the freeholder. This ground rent can sometimes be a token gesture, effectively just affirming the position of the freeholder. But there are increasing incidents of freeholders imposing onerous ground rent charges and the cost of this ground rent needs to be considered as part of the overall cost of owning the property, which can ultimately affect its value. We recently valued a leasehold property where the wording of the lease allowed the ground rent to double every two years, which would leave the purchaser liable for an astronomic amount in the future and this meant the property was not readily resaleable, so it could not achieve the value the vendor had wanted.

Nationwide has introduced a policy that it will only lend on leasehold properties where the ground rent is a maximum of 0.1% of the value of the property and this has helped to establish a benchmark. But there are still properties where an onerous ground rent can influence the value, particularly amongst new builds that have been built by profit-hungry developers.

If you are working with a client who has issues with the lease on a property, don’t just give up. Speak to a specialist surveyor who can understand the implications of the lease to establish a true value and could help to extend the lease and create a saleable asset. You can get an estimate of the cost of extending a lease by visiting here.