Why you should never buy a leasehold property

Having bought a leasehold property, you may think you own it. But you don’t, says Merryn Somerset Webb. Your freeholder owns it, and you are entirely at their mercy.

180904-leasehold
Buy a house freehold, and a flat commonhold or share of freehold

Of all the miserable property market stories around at the moment, the ones about the owners of flats in buildings covered in Grenfell-style cladding are among the worst.

According to the Telegraph, around 20,000 leaseholders face bills that could "total hundreds of thousands of pounds just to make their homes safe" (a total of 293 private blocks are involved). Until that is done, they are unable to sell (who would buy a flat in a building clad like this?), remortgage (if no one will buy, the flats are worth less than zero) or even get a homeowner loan for the works (ditto).

The government reckons the freeholders (who own the actual buildings) should pay up (it's a "moral responsibility"). But that's not how the system works. The structure of a leasehold building and the land on which it sits might be owned by the freeholder (to whom the whole property reverts at the end of the leasehold, be it in 99 or 999 years), but the costs of keeping the show on the road in terms of maintenance and repairs falls on the leaseholder to whom the freeholder passes them (on top of the annual ground rent).

In some cases, freeholders have stepped up: in one block in Croydon, Barratt Homes, which developed the complex in the first place, is paying the £13,000-£31,000 per flat for the recladding. That may happen in some other cases, but given what the Telegraph calls the "complex web of companies involved in the construction, ownership and insurance of these homes all denying responsibility and pointing out that the building was signed off against regulations" it's hard to imagine it will happen in all of them. Note that in each case where residents have attempted to make a freeholder pay through a tribunal, they have lost "as it has been ruled that their leases state that they are liable."

I've written about why you should never buy a leasehold property before (it's all about control...), but this nightmare should be one more reminder as to why it is a bad idea the key reason being that you don't own or control a leasehold. You will have paid for it as though it is yours, but it isn't and as long as you "own" it, you will be at the mercy of your freeholder.

Houses should be bought freehold (always the developers selling new-builds leasehold at the moment are behaving very badly indeed); flats should be bought commonhold or share of freehold. It is true that in this particular case the expense of recladding would, of course, still exist but the confusion, court cases and inevitable cost-padding would not.

In bubble times you can get out of dodgy homes. These aren't those times. Nationwide numbers tell us that house prices are growing at their lowest annual rate in six years (2%) and that on a monthly basis they have fallen slightly (-0.5%). Prices in London are leading the way falling at their fastest since the financial crisis and with Help-to-Buy (one of the main drivers of rising prices) on the way out (there's a "fundamental review" under way), it's hard to see that not continuing.

At some point there will bargains to be had (relatively speaking, at least) and it is worth noting that the market is strong in the Midlands, parts of the north and in some of Scotland. But if you are looking to buy, just remember to buy something that you will really own. So not a leasehold.

Recommended

Why do house prices just keep marching higher?
House prices

Why do house prices just keep marching higher?

Other asset prices may be dropping off as the second wave of Covid hits. But house prices just keep on climbing. John Stepek looks at what’s behind t…
30 Oct 2020
Being unpopular can make life easier for companies – just ask BP and HSBC
Investment strategy

Being unpopular can make life easier for companies – just ask BP and HSBC

When you're as hated as banking and the oil sector, it doesn't take much to pull off a nice surprise. John Stepek explains what that means for investo…
27 Oct 2020
10 ways to improve your home and interiors
Advertisement Feature

10 ways to improve your home and interiors

From shepherd huts, to pool tables, smart technology to high-tech security, here are some great ideas for home improvements
26 Oct 2020
Why house deposits and pensions don’t mix
Pensions

Why house deposits and pensions don’t mix

First-time buyers should not be able to raid their pension savings to pay for a house deposit.
26 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020