The Dangers of Leasehold
Should Leaseholds be Scrapped?
Recently on the BBC there was an article detailing a young woman’s struggle after she bought a leasehold on a house. She ‘was told that after three years she would be able to buy the freehold from the development’. However, in that time the freehold was sold to an investor who doesn’t want to sell it. She now feels trapped as no one will buy the leasehold from her. She cannot make any changes to the house and she is paying high charges set by the freeholder. This, and lots of stories like it, have led to debates as to whether leaseholds in general should be scrapped.
What does this mean for us as professional investors?
Well, as people within Fielding Financial will know, we prefer using freeholds. This is because of the options freeholds allow us. There is a place for leasehold strategies when used correctly. We need to learn from these situations, like the one described in this article. To make sure we use leaseholds properly. The first issue this article brings up is with communication. Those that have been on the courses will tell us how important communication is when carrying out a property deal. The leaseholder on the BBC feels trapped because freeholders never explained the situation to her. The freeholder even lied to her. She was told she could buy the freehold later but when the time came to sell, he sold it to someone else (presumably for a higher price).
When using leaseholds, it is within our best interests to make sure that our tenants and our freeholders understand what we are doing. By keeping all parties happy we can get things like repeat business and recommendations from the people we deal with, and the property will be looked after better. All deals have the potential to be win-win. Obviously, this is more difficult when there are more people involved. Hence why we prefer freeholds, but it is still important.
The second issue this article brings up is education, something we cover more with ‘Money Mum’. A big problem here is that the leaseholders generally don’t understand what they are getting into. This has led many freeholders to take advantage. One of the leaseholders from the article said, ‘developers say ‘flats to buy’, but you actually cannot buy it, you are only buying a lease’. This is also the problem with the woman spoken about earlier, she was told she would be able to buy the freehold but unfortunately for her word of mouth isn’t enough and she needed it in writing. Again, how could either of these people have known if they aren’t taught. With ‘Money Mum’ this is exactly what we are trying to correct. By providing support for people that are confused and teaching in schools. Situations like this can be avoided.
Don’t get taken advantage of!
A second article I read in ‘the Times’ was even more horrifying. It detailed many cases where freeholders add massive legal and refurb costs onto leaseholder’s service charges. Usually this is done by large freehold companies with strong legal representation and backup funds, but it is a word of warning to all freeholders. One case from the article states that having won a case to reduce his service charge bill by ‘£1,200’ in the tribunal. A leaseholder was then sent a service charge bill for ‘£61,300’ to cover the freeholders legal fees. This is obviously ridiculous. Cases like these have prompted the housing secretary to ban freeholders from charging leaseholders for legal fees. However, there are still cases where freeholders charge leaseholders refurb costs. Even if they can claim it on insurance. So, for anyone who is a leaseholder this article sets out ways to avoid being taken advantage of by your freeholder. One of the key points is to make sure that anything that can be charged to the leaseholder is laid out clearly in the contract. This could have helped the woman from the BBC article had she known. Also, if you are a freeholder make sure you are not charging for anything that you shouldn’t be. I’m sure everyone here will be doing their due diligence, but you may be incorrectly charging by accident.
These articles are interesting so I would recommend reading them if you haven’t. Unfortunately for us it is situations like these that give us a bad reputation. Amateur landlords and big freehold companies abuse vehicles like leaseholds to take advantage of people. These articles show that leaseholders and the government are getting wise to freeholders’ actions so it is up to us to stay professional whether we are the leaseholders or freeholders. The only thing we can do as professionals is to stay educated and make sure we keep all those we deal with happy.
If you would like to learn how to use these vehicles to invest in property make sure you go on our Free Property Investing Seminars