Sometimes a quick chat can prevent a slow burner of problem.
For one developer I spoke to recently, our exchange stopped him walking into a trap, whilst building a block of leasehold apartments, that could have made him public enemy number one decades later.
Apartments are almost always sold as leasehold, with long tenures of 125 years or more, as this is the easiest way to manage the shared maintenance obligations that communal areas create.
It has become increasingly popular among developers to keep the freehold and then sell it to a property investment company, once the build is finished. The freeholds themselves are worth very little, but the ground rents generate a desirable regular income.
It is not uncommon to see the occupants of leasehold apartments paying ground rent of between £200 and £500 per year and consequently, selling the freeholds is a good way for developers to increase the yield on their site.
Of course, inflation will erode the value of ground rent over time, but leases try to allow for this. And that is where the trap lies…
A PR disaster in the making
Some developers use very simple legal drafting to try and correct the inflationary problem, stating in their leases that ground rent will double every ten years. However, this means it will quickly reach unmanageable levels.
For example, if your ground rent starts at £400 per annum, by the apartment’s 20th anniversary, it will have increased to £1,600 and once the property is 60 years old, the occupant will be expected to pay £25,600 a year. Taking this to its conclusion, at the end of a 125-year lease, the annual ground rent would have reached £1,638,400!
Clearly this is ridiculous and the press has picked up on the issue, reporting the plight of some apartment owners caught in leases with these clauses. As a result, developers have been panned in the media and the government is now considering a law preventing the leasehold system being abused in this way.
What should developers do?
Essentially, the problem lies in the poor drafting of leasehold agreements, but it is the developer who takes the flak if things go wrong.
The advice I provided to my contact was to make sure he used a solicitor who had experience in leasehold developments. Yes, you are unlikely to want to keep the freehold yourself once your apartments are complete, but selling it to an investment company is just one option – there are various others we can discuss.
If you would like to talk about leasehold agreements in more detail, don’t hesitate to give me a call; Tel: (0114) 218 4121 or email info@tayloremmet.co.uk
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