How Leasehold Should Work

Leasehold is a unique feature of the English and Welsh property markets and up to a point it makes a certain degree of sense. For example, the fabric of a block of flats may need to be managed as a single entity, even though each of the flats themselves may have a different owner. For similar reasons there may be some logic to having a leasehold arrangement for terraced and even semi-detached homes. Currently in the UK, however, even detached homes are being sold on a leasehold basis. What’s more, the manner in which some leaseholds are being run is so archaic and feudal that it would be fair to call it a national scandal.

The history of leasehold

Although the basic leasehold system dates back, literally, hundreds of years to the Medieval feudal system, the modern concept of leasehold effectively started in the 1920s. It basically allowed landowners to rent out their land for very long periods, thus guaranteeing themselves an income from it regardless of changing circumstances. It really took off in the 1950s as the population grew and housing developments increasingly focused on flats, which could contain more housing units in less ground space. In the 1960s, however, the shortcomings of modern leasehold began to become apparent as elderly tenants started facing eviction as their leaseholds came to an end. Since then the problems with leasehold have only been getting worse.

Leasehold in 2017

The National Leasehold Survey 2016 revealed that 57% of leaseholders agreed with the statement “I regret purchasing a leasehold property”. In other words, less than half of leaseholders surveyed are happy with their situation. Looking at stories featured in the press, much of this discontent seems to stem from home builders selling on freeholds to third parties, who then increase ground rent charges in a way which is completely unrelated to either inflation or the cost of the services they provide (if any). Some home owners have complained that the freehold to their properties was sold on without their knowledge or that when they tried to buy the freehold, they were quoted a completely unrealistic price for it. Some home owners have even been advised that their leasehold situation effectively makes their homes impossible to sell as mortgage lenders will not lend against homes with what they perceive to be excessive rent review clauses. Others have complained that even minor changes to their homes trigger extortionate fees from their freeholders. While the push towards creating more new-build homes is desirable for many reasons, it does mean that more people are going to find themselves dealing with leaseholds for the first time and that means that the scope for discontent is even higher than it is now – a fact, which has been noticed by parliament with housing minister Gavin Barwell calling the current leasehold system a “widespread problem that needs addressing”.

Looking North for alternatives

In Scotland, leasehold properties are the very occasional exception rather than the rule. The issues surrounding management of the fabric of buildings such as flats and other communal areas such as gardens are addressed by means of what are called Deeds of Conditions. Often, these deeds of conditions will involve the use of what is known as “factoring services” to carry out maintenance duties. Although this system is still far from perfect in that home owners can be left dissatisfied with the way the factoring company performs its services (or not as the case might be), it does resolve a number of the issues related to the leasehold system in England and Wales. It is also entirely possible that the Scottish government will heed calls to review the way the factoring system operates to address some of the concerns raised.

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What should you consider before investing in property?

Keeping part of your wealth in property has become almost an investing axiom over the years and there are many good reasons for this. Having said that, there are generally exceptions to every rule of thumb, so here are some points to consider before you decide whether or not to invest in property.

  1. Does property investment fit into your overall financial/life goals at this precise point in time?

The idea of investing for the long term applies to a wide range of investments and it is generally critical to the success of property investment. If you are currently in an uncertain period of your life, for any reason, then it may be best to wait until you have a clearer picture of where you are now and where you are likely to be going forward before you make a commitment to any kind of property investment.

  1. Are you prepared to accept the fact that the property market moves at a relatively slow pace?

Some forms of investment, such as shares, can literally be bought and sold at the click of a mouse. Property investment is often different. Even high-quality and desirable property, which is clearly in the right area, takes time to buy and sell, if only because of all the legal boxes which need to be ticked. With other forms of investment, it can be perfectly feasible to sell one form of investment quickly so as to have funds readily available if a better opportunity presents itself. With property investment, astute investors have to be prepared to adapt a strategy which is suitable for the slower pace of the property market and either always keep funds available so as to be able to act quickly when new opportunities arise or be willing to plan changes well in advance.

  1. Is property investment actually a topic which interests you?

This may seem a strange point, since the aim of investment is to make money and, depending on the aim and strategy of the individual investor “dull” investments such as bonds and blue-chip shares can be far more appropriate than more “exciting” investments such as technology start-ups. In reality, however, successful investors need to have an understanding of their investment area(s), whatever it/they are. This means being prepared to spend time on research both prior to making the initial investment and, on an ongoing basis, to ensure that the investment(s) continue(s) to be appropriate to their needs and wants. Doing this research is likely to be much more enjoyable if property investment is something you actually find interesting.

  1. Do you want to focus on capital gains or yield?

As an investor, you might want to have both, in fact that’s perfectly understandable, but you can only make one of these your primary focus, so you need to decide which it is. If your strategy changes at a later date, then you can always adjust your investments accordingly. If you are going for capital growth, then you are likely to find yourself looking at different kinds of investment properties than those who are mainly interested in yields. For capital gains you may well find yourself looking at property in up-and-coming areas and/or property in need of substantial refurbishment or with legal challenges such as short leases. For yield, you are more likely to be looking for property in areas which meet certain criteria in terms of quality of life and which have the demographics which interest you, be that students, families, international professionals or retirees. You may also be more interested in quality new build property, since it will come in liveable condition and will also come with a builder’s guarantee, for an additional level of reassurance.

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Top 5 Property Development Mistakes

If daytime TV is to be believed, anyone can make a career in property development and can somehow managed to turn in a respectable profit on a property in spite of costs and building time both being substantially higher than expected. In the real world, most people realise that if it was that easy, everyone would be doing it. If, however, you do want to develop a property yourself, either as a career or as a one-off project, here are the top mistakes to avoid.

Buying unsuitable property or land

If you fall in love with a place to live and you want to develop it yourself from start to finish to be your dream home, then what you buy can be guided entirely by your own preferences. If, however, you want to make a profit out of the development then you need to ensure that any property or land you buy has decent commercial prospects. Often this means making yourself thoroughly familiar with the local area as a whole and understanding what the future is likely to bring.


In principle a lender should pick up on whether or not you are over-stretching your finances, but at the end of the day, it is your responsibility to manage your money. Starting out on a stretched budget before you’ve even started your project is, quite bluntly, a way to set yourself up for heartache and wallet ache.

Underestimating the money and/or time required

Learning to price developments accurately is vital for anyone who wants to make a career as a property developer and is still hugely important to anyone taking on a property development project for their own interest. Property development companies check their figures very carefully before committing to any commercial project, they also have extensive experience to guide their judgement. Amateurs are probably best advised to check their figures as best as they can and allow themselves a substantial financial cash cushion in case of error. Similar comments apply to estimating the amount of time required for a project. Getting this wrong can seriously damage your budget.

Failing to understand the importance of a professional and independent architect.

As a rule of thumb, if a project is substantial enough to need planning permission, it probably needs an architect’s involvement and even if it isn’t an architect could still be very useful. Employing an architect directly means that their only responsibility is to you, their client. Using a builder’s architectural services can set up a conflict of interest since the decisions which make the highest level of profit for the builder may actually be the wrong ones for your property and unless you really know your way around property development well enough to pick up on this, you may wind up spending a lot of money for little to no return.

Getting the wrong builder

Sadly, cowboy builders are a fact of life rather than just a TV fable. It’s vital to avoid them (an architect can also come in useful here as they often know their way around local construction companies).

Trying to pack too much into too little

This is another mistake, which may be down to the influence of daytime television. In a densely-populated country such as the UK, space is at a premium and therefore, on a like for like basis, the more people who can share a space, the more economical that space becomes. Hence people who already own homes they like may well try to squeeze a little more usability out of the space they have so they can avoid having to move (or at least delay the move). The key point to remember, however, is that spaces need to be liveable. Multifunction furniture and modern technology may have made it possible to live, comfortably, in smaller spaces, but there are still limits and this needs to be recognised.

Certainly it’s worth talking to a professional development company, it could save you a lot of the heartache but still give you similar or even better returns.

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