Are leasehold extensions making so-called 'affordable homes’ unaffordable?

In November 2018 G15 – a group comprising London’s largest housing associations – launched an Offer to London to ‘build more genuinely affordable homes for people living in the capital’.

G15 members own or manage 600,000 homes, housing one in ten Londoners, so a commitment to providing affordable homes is potentially significant.

However, at least one of G15’s members are being accused of failing to grasp the ‘genuinely’ aspect of ‘genuinely affordable housing’.

Metropolitan Thames Valley Housing (MTVH) homeowners in one block of flats in Homerton, east London are alleging that the housing association failed to provide essential information on lease extensions resulting in substantial, unexpected and potentially unaffordable costs.

In 1999, Metropolitan Home Ownership (which has now merged into MTVH) converted the former light industrial units into flats. These were sold, initially via a shared ownership scheme, with 99-year leases. Leases can extend up to 999 years, but 99-year leases are common for housing association flats.

“Owners of leasehold flats don’t actually ‘own’ their home at all.”

Why does the length of the lease matter? Owners of leasehold flats don’t actually ‘own’ their home at all. The length of the lease simply establishes the amount of time ‘owners’ can occupy the property until the lease runs out, or they have to pay to extend it.

LEASE – a provider of free advice on the law affecting residential leasehold properties – says ‘If your lease has less than 99 years remaining then you might think about extending the lease. This is particularly important if your lease has just over 80 years remaining, as lease extension becomes much more expensive when a lease falls below 80 years.’

The increased cost, once the 80 year threshold is crossed, arises because the landlord becomes entitled to 50% of the so-called ‘marriage value’ – the increase in the value of the property arising from the lease extension.

Mortgage providers are less likely to offer mortgages on flats with shorter leaseholds, meaning extending the lease is essential if people don’t want to lose the value of their home or may want to sell it.

Once a lease term falls under 60 years it may become practically impossible to obtain a mortgage. But the shorter the lease, the more expensive to extend it. If they can’t afford to extend the lease, homeowners can become trapped in a ‘wasting asset’ they can’t sell, with the value of their home declining year on year even in rising property markets.

One resident in Homerton said “We needed to re-mortgage and we were shocked when our surveyor explained the implications of just 79 years remaining on our lease.

“We’ve never had any communication from MTVH about lease extensions. They send us a statement of service charges every year. Why don’t they include a statement of the remaining lease length alongside an explanation of the implications and options?

“MTVH will charge us around £18,000, plus legal fees, to extend the lease. We’re not sure where we’ll find that kind of cash.”

“Now MTVH will charge us around £18,000, plus legal fees, to extend the lease. We’re not sure where we’ll find that kind of cash. And all the cards are in their hands. We can’t even negotiate without having to pay their legal fees as well as our own.”

MTVH claim that ‘Our aim in everything we do is to support customer independence’. But the absence of information and advice on the unique complexities of leasehold law has the opposite effect.

A spokesperson from Metropolitan Thames Valley said:

“We have responded to requests for information about lease extension at this block and will continue to provide all the information and support we can to residents.”

“Shared ownership is designed to help people who have been priced out of the market to get on the property ladder. The model and funding for shared ownership was set out by the government and comes under the remit of Homes England. It is delivered by housing associations, which are regulated, not-for-profit organisations. Shared ownership homes are publicly subsidised and the terms and conditions attached to them – including the lengths of leases – are outlined to buyers when they apply for properties. It is the responsibility of owners to monitor the time remaining on their leases. This is the case for all leaseholders in England.

“Metropolitan Thames Valley uses the shared ownership lease model. The length of the term in that model when the block in question was built was 99 years. This length is also not uncommon on leasehold properties bought in the private sector.

“The cost of extending a lease is established by an independent surveyor – and is based on factors including the value of the property, the length of time remaining on the lease and the ground rent value. Metropolitan Thames Valley does not determine the value of the lease extension.

“We recognise that having a lease term below 80 years can become a problem when an owner wishes to sell – as a potential buyer may struggle to get a mortgage on a lease with a low number of years and a cash buyer can be difficult to find. For this reason, we offer residents the option of selling their home and extending their lease at the same time – with the cost of the lease extension included in the sale price, meaning they don’t have to pay for this cost up-front themselves.”

As council housing continues its decline, spats with housing associations and their tenants over leasehold extensions are likely to rise – particularly if residents are not given information which would enable them to plan their finances.

Are housing associations’ mission to offer genuinely affordable housing in conflict with their internal income generation targets?

Sue Phillips is a financial expert and freelance writer.

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