“Leasehold is a symbol of our broken housing system, with millions of England’s homeowners feeling like they’ve bought their home but still don’t own it.”
Those are the words of Labour’s shadow housing secretary John Healey yesterday, as the party set out some radical proposals to tackle the problems plaguing the country’s 4.3m leasehold properties.
Rather than owning the land underneath the property, leaseholders rent from the freeholder for a period of time – typically decades.
While leasehold contracts aren’t necessarily all bad (and they arguably make sense with blocks of flats), such agreements have come under a harsh light in recent years, as some leaseholders have faced exploitative ground rents and fees. These clauses can make it difficult for homeowners to sell their properties, leading to what has become known as the “leasehold trap”.
Shared equity is a leap of faith as it is, without housing associations gaming the leasehold system as well
The good news is that this scandal is finally being investigated by the Competition and Markets Authority, while housing secretary James Brokenshire recently pledged to set ground rents on new builds to zero.
The bad news is that there is still a way to go to fix the problems, while the saga around leasehold contracts gets more complicated for buyers using the shared ownership scheme.
With normal leaseholds, after two years of living in the property, you have a statutory right to extend the lease by at least 90 years and reduce ground rent to zero. But with shared ownership, unless you have staircased up to purchase 100 per cent of the property, you won’t have the same legal right to extend the lease.
So how much of a problem is this?
According to advisory service Lease, one common issue raised by existing shared owners is whether they can extend the lease.
Given that many contracts can be highly dubious with uncertain leasehold terms, the worry is that some homeowners won’t extend the lease once they have bought the remaining shares in their property, partly due to a lack of awareness.
As Eric Shapiro, director at Chestertons, points out: “the issue of a depreciating asset arises when people have staircased up to 100 per cent ownership, but then ignore the issue of the lease extension until it’s at a point when it’s too late”.
Costs are also a problem. Extending a lease can run into tens of thousands of pounds – and the shorter the lease, the more expensive it is to extend.
While new flats are generally sold with at least 99 years on the lease, if you neglect to extend it once you have staircased up, you will either have to reduce the price of your home to attract a buyer, or pay to extend the lease before you try to sell.
Bear in mind that a lease of less than 80 years can severely devalue your home, while lenders are unlikely to grant a mortgage against a property with under 60 years.
Sebastian O’Kelly, director of Leasehold Knowledge Partnership, says that there are cases of catastrophic resale prices. “A shared ownership property with less than 85 years on the lease is almost certainly going to sell for considerably less than the original price that was paid,” he warns.
“Shared equity is a leap of faith as it is, without housing associations gaming the leasehold system as well.”
However, Shapiro doesn’t think it’s that much of an issue.
“In my experience, most leases are now 125 years, which gives buyers of shared ownership properties a healthy timescale over which they can staircase up to 100 per cent ownership before they must consider extending the lease,” he says. “The best way to avoid this scenario and have peace of mind, whether you’ve bought using shared ownership or not, is to begin the process of extending your lease in good time of its expiry.”
For shared owners, extending the lease can also be a more complicated process than anticipated, particularly as housing associations will have different policies. While you don’t have the legal right to extend unless you own all of the equity in the property, some landlords have their own policies which allow lease extension with less than 100 per cent ownership.
In that case, the shared ownership company must also enter into the purchase with you, as it would be liable for part of the payment, explains Simon Gerrard, managing director of Martyn Gerrard estate agents.
And while asking a shared ownership company to stump up cash for a lease extension might sound unlikely, Gerrard points out that it actually stands to gain from this as it means that the property will hold its value.
“Bear in mind that often the shareholder companies also own the freehold, again providing further incentive for them to agree to the purchase of an extension. If they don’t agree then, given the value of the property will fall, it becomes easier to purchase a greater share of the property, so either way there is an avenue for shareholders to gain more control.”
Regardless of the issues, the shared ownership scheme is a popular way of helping people get their first foot onto the housing ladder.
So any government looking to reform the leasehold system can’t ignore this vast subsection of the property market.