A recent survey has shown property owners in the UK have a ‘shocking’ lack of understanding of the rules of leaseholds, due primarily to bad conveyancing advice, with over 50% of leaseholders unaware of the rules on leaseholds!
Research from law firm Bolt Burdon Kemp claims leaseholders don’t know nearly enough about how leases work, the rules on extension of leases and most disturbingly, the consequences of failing to extend a lease when it has run out.
The so-called 80 year rule is relatively unknown, yet critical to household owner’s financial safety; once a property lease falls below 80 years, its extension will cost thousands, sometimes even hundreds of thousands of pounds of the owner’s hard earned cash – and once the 80 year mark is passed, nothing whatsoever can be done to avoid it.
The reason for this is relatively straightforward: The current law states that after a lease term drops below the critical 80 years, the way in which the cost of the lease extension is calculated changes drastically. Essentially, whenever a lease is extended, the freehold value drops. It is only when the lease has less than 80 years to run that the leaseholder is required by law to pay the freeholder compensation for the aforementioned loss in value. This causes the issue for leaseholders who allow their lease to get to the point where there is less than 80 years left; if they ensure there are more than 80 years left on said lease then no compensation will be payable.
Over 50% of property owners are unaware of the 80 year rule, and worse still, 36% don’t have any idea how long their lease is. Considering almost all apartments and flats in England and wales are leaseholds, coupled with the fact that no one actually seems to know much about them, we have ourselves a rather fast approaching disaster. Many of us are sitting on ticking time bombs ready to wipe out our bank balance. Scarily, one fifth of leasehold owners don’t realise that they currently have less than 80 years left on their leaseholds and therefore will unavoidably face hefty bills when trying to extend them.
Furthermore, a lease with less than 80 years left becomes considerably less valuable – making it a financial burden, giving owners grief when attempting to sell or mortgage it.
The survey goes on to reveal that many participants were never given any information or guidance about their leases or the importance of renewal; the majority were unaware that they could simply extend their lease after just two years of ownership. At a time when the number of leaseholders has increased, this is simply not good enough.
Buying a leasehold is a complicated subject, fraught with dangers and potential concerns for the new owner – this lack of knowledge is bound to cause major problems and expense for owners further down the line, most of whom had no idea what they were getting themselves into.
‘It is clear from these results that leaseholders are simply not being given enough information by their professional advisors before buying flats and apartments. This is creating a ticking time bomb for many leaseholders,’ said Stephen Hill, partner at Bolt Burdon Kemp.
‘Not knowing the length of your lease or the impact if it falls below 80 years is very serious, it could mean you struggle to sell the property or renew your mortgage. Solicitors and conveyancers advising leaseholders must do more to ensure property owners are fully aware of what they are getting themselves into when they buy a lease,’ he added.
As a lease creeps below 80 years, it continues to lose value and consequently becomes more and more expensive to extend its term. Once the lease is allowed to reach 60 years, lenders are much less likely to give a mortgage on a property, and it goes without saying that people are much less likely to buy it.
Saying that, not all buyers are clued up and in the know; Although 50% of those surveyed knew that their lease had more than 80 years left on it when they bought their home, 20% purchased a property which had less than 80 years left on the lease and 29% are not sure or couldn’t remember if they did.
‘The general lack of knowledge around the 80 year rule is shocking. This is one of the first things property buyers should be enquiring about when they are looking to buy a home which has a leasehold title rather than a freehold,’ Hill explained.
But isn’t this precisely what conveyancing solicitors are for?
You would think that your conveyancing solicitor would ensure that you knew exactly what you were getting yourself into, and would be sure to provide you with details of how to renew a leasehold as required. However, the research by Bolt Burdon Kemp reveals that shockingly, 39% of leaseholders surveyed were not advised of the significance of the 80 year rule before taking the plunge and investing, nor were 42% of them advised to take legal advice in good time before the lease dropped below the critical 80 years.
This has resulted in the vast majority of property owners’ complaining of hidden lease costs, with the average hidden cost totalling as much as £2,269. 28% have paid between £2000 and £5000 in hidden lease costs and 26% of these poor unsuspecting owners have had to ask for financial help from family or friends to cover these extra costs.
In times of financial hardship and with the difficulties already surrounding getting on the property ladder, this is a sorry situation indeed.
Hill of Bolt Burdon kemp considers conveyancing solicitors to be at fault, saying if they were doing their jobs properly these hidden charges could be easily avoided or used as a negotiating tool when deciding on purchase price.