Why buying a leasehold property might be the worst mistake you’ll make

You might think you’ve found your dream home, but for some leasehold property owners, it’s turned into their worst nightmare.

Terms that come with some leasehold agreements can mean they end up being eye-wateringly expensive, while others mean you have very little independence to make even small changes to your home.

With a leasehold contract, you “own” everything that sits within the four walls of the home, but not the land around it, or the ground below it.

This type of contract is almost always the norm when buying a flat, with a building owner or landlord continuing to own the other flats in the block, but some houses have also been sold under leasehold contracts.

Recent announcements in the King’s Speech suggested things could soon improve, with reforms due to ban new leasehold houses, and make it “cheaper and easier” for leaseholders to purchase their property’s freehold, along with a crackdown on management fees and service charges. 

Leasehold homes can be cheaper than freehold properties, and as such are commonly bought by first-time buyers, relying on this type of property to get a foot on the housing ladder.

The problem is, leasehold can come with a hefty price tag. You may need to pay service charges and annual ground rent to the freeholder. Over time, these charges can increase exponentially, with seemingly little justification.

Figures suggest there are currently around 5 million leaseholders in the UK.

While the system works for some, many have found themselves trapped in this archaic system by a combination of unjust practices and unscrupulous companies.

Here, Telegraph Money takes a look at how leasehold works, what to watch out for if you’re considering buying a leasehold property, and what changes we might see in future.

Isn’t there talk of government reform?

As the King’s Speech demonstrated, leasehold reform is still on the agenda, but the Government’s initial plans to completely abolish the “feudal” leasehold system have been watered down, as such large-scale reform cannot be brought about before the next election. Levelling Up Secretary Michael Gove had previously pledged to do away with this system altogether.

With issues such as hefty service charges, soaring ground rents and cladding costs blamed for preventing homeowners from remortgaging and selling, leasehold has been a homeowner’s bugbear for years.

Some of these issues will hopefully soon be resolved, as King Charles stated there are plans afoot to help those with leasehold properties buy the freehold, and help those who’ve been targeted with punitive service charges. 

It was also announced that new leasehold houses would be banned, but flats would continue to be sold under leasehold terms.

Meanwhile, Labour has previously pledged to bring in legislation to abolish leasehold within its first 100 days if it wins the next general election. The party said it wants to overhaul this type of contract, and has made calls for a “more workable system to replace leasehold flats with commonhold”.

So just why does leasehold get such a bad rap?

Accelerating ground rent and service charges

Some leasehold contracts include ground rent terms, with doubling clauses that essentially allow freeholders to double the price every 10 years or so. As a result, some people have become trapped in homes they cannot sell or remortgage.

James Forrester, of property developer StripeHomes, said: “Leaseholders have long had to face unjustifiable increases in ground rents at extortionate rates, leaving them in financial turmoil.”

Service charges, which cover everything from building insurance, to management costs, running costs, repair and maintenance, are also subject to changes.

Mr Forrester added: “If a sizeable repair to the roof is required, for example, the leaseholders will have to foot the bill. These service charges are generally split across all leaseholders regardless of whether or not you actually use the services provided.”

In short, if the freeholder charges extortionate amounts for work that gets done, you have no control over this.

Riddled with restrictions

Another risk when buying a leasehold property is finding there are a lot of restrictions in place.

While some of these may be more mainstream, such as not being allowed to sublet or keep pets, other clauses can be a lot more weird and wonderful.

For example, some might stipulate that leaseholders aren’t permitted to use a washing machine or tumble dryer, or are required to pay for terrorism insurance (even though they live in a tiny peaceful village).

Jeremy Leaf, a north London estate agent and former RICS residential chairman, said: “In some instances leases can prohibit hard flooring in living areas and bedrooms, leaving a buggy in a communal hallway, and smoking – even in communal garden areas.”

Also, take care if you plan to work from home – especially if your work involves clients coming to see you – as many leasehold flats cannot be used for business purposes.

If any of the rules are violated, this can result in you losing your lease.

Changes are not permitted

With a leasehold property, you aren’t able to make any major changes without obtaining permission from the freeholder first.

Nathan Emerson, of agent membership body Propertymark, said: “Buyers of a leasehold property need to be aware of limitations, sometimes many centuries old, where homeowners are confined from making desired changes and updates to their homes. It’s always essential to seek legal advice.”

Restrictions can be wide ranging; in some blocks of flats with poor water pressure, for example, installation of a combi boiler may be prohibited. You may not even be able to make cosmetic alterations, such as changing the front door or replacing the doorbell.

You may only be allowed to carry out alterations if you pay a fee to get plans approved.

Issues with a short lease

Unlike a freehold, a leasehold is not permanent. You own the property for the length of time stipulated in the lease.

This is often hundreds of years long, but once it expires, ownership of the lease transfers back to the freeholder. There is then a cost involved to extend the lease period.

Mr Forrester said: “The shorter the time left, the more complicated and costly this process is, not to mention the fact that you may struggle to sell and benefit from any capital appreciation.”

Leasehold does have its upsides

While many homebuyers will be understandably wary of leasehold properties, they remain incredibly popular, particularly in major cities.

Mr Forrester said: “Leasehold does offer a number of buyer benefits. Homes are often more affordable, and offer the first stepping stone for many looking to climb the ladder, primarily due to the fact most leaseholds are apartments in a wider block.”

Another benefit is the fact as a leaseholder, you aren’t responsible for the maintenance of the building or upkeep of the communal area.

Mr Forrester added: “While cladding issues are certainly a concern, ensuring you are a qualifying leaseholder will protect you from all cladding system costs, and provide peace of mind in this respect.”

Go in with your eyes open

With a leasehold property, it’s key to read up on the full terms so you know exactly what you are getting into. The stipulations can vary considerably from one property to the next.

Mr Forrester said: “As a rule of thumb, don’t purchase anything with less than 100 years left on the lease – and look to extend the lease before you reach this point.”

It’s also important to know from the outset what you’ll be charged in fees, such as ground rent, and when you’ll owe it. You also need to find out if costs may increase over time.

Mr Forrester said: “Look out for clauses meaning ground rent can climb consistently over the duration of your lease. Check if you are subject to such a clause before purchasing.”

If there’s anything in the contract you’re not happy with, you may have little choice but to make the difficult decision to walk away from the property.

But if this means you avoid getting stung with escalating charges you can’t afford further down the line, you may just thank yourself for taking that decision – and dodging a potentially very costly bullet.

This article was first published on July 20, and has since been updated.