Buying leasehold

VICKI HOLDER checks out the facts on buying a home on leasehold land.

Opting to buy a home on leasehold land raises many issues and means confronting complexities that don't exist with freehold property.

Many types of leasehold exist in Auckland. More recently, thousands of people have taken up the option to buy leasehold apartments in areas such as Auckland's Viaduct Basin, giving people the chance to live stylishly and conveniently close to cafes, bars, restaurants and shops in the hub of the action.

Jeff Cate, manager of Barfoot & Thompson, Remuera, says leasehold plays an important role in real estate, because it lets people live somewhere they may not normally be able to afford.

"It means instead of paying, say, $1.5 million for a home, you can invest $800,000 and perhaps put the rest of your money into the business. There are tax reasons why it's advantageous," he says.

While some regard leasehold with suspicion, Cate says it's just another way of borrowing money. Depending when the leasehold rentals were struck, the interest rate is generally around 6.25 per cent. It's like having a second mortgage.

"I personally believe some of the current rates are too high," he says. "The owners of the lease are getting prime people to buy their houses at a rate that's too close to, or in excess of, current interest rates. They are a captured market, because they look after it, but they can't physically move the house, which doesn't seem fair."

However, in times of high inflation and big interest rates, leasehold always appears to be a bargain. When there's low inflation and interest rates, it appears expensive, he says. "It's always been very political."

He comments that multi-unit development sites make particularly good use of leasehold land, because individual owners share the cost of the rental, making it more affordable.

Rentals vary with the different types of leasehold. There are some interesting situations, says Cate, such as the Maori land in Parnell that has a rental holiday for 11 years. People should remember that at the end of that term, the rental will rise to market rates.

One of the advantages of owning leasehold with the Dilworth Trust is the Trust gives its leasehold occupiers a 20 per cent discount if they want to freehold the property half way through the term.

Suzanne Learmonth, of legal firm Burton & Co, says before you step into a leasehold situation, you should be aware of precisely what you're buying. Particularly when looking at apartments, many people focus on the apartment and forget about the legal title. Learmonth advises people to seek legal advice about the terms of the ground lease before handing over their money.

She says you should look at how the ground rent is calculated and the intervals for the rent review. Most ground rents are calculated to keep abreast of property values and will move to a market rate when the term is renewed.

When buying any kind of leasehold, people also need to ensure the purchase price reflects the fact you're paying leasehold. But remember, in some areas of Auckland, such as the Viaduct Basin, the only way you can live there is to pay leasehold. Prices paid reflect the high demand for property.

Buyers should check when the ground rent review is due. If it's going to escalate, they should find out how the rental has been calculated and get both legal and valuation advice to check the calculation.

Note that in a unit title development, all apartment owners in a building become members of the body corporate. The body corporate effectively becomes the lessee. The body corporate then deals with the review as they would with any other matter related to the building.

When it comes to selling your leasehold apartment you don't have to go to the ground lessor for approval. You're free to sell your apartment without the need to seek any lessor approval. Cate points out that for 30 years real estate agents have sold leasehold properties for a commission equivalent to what would be charged if the homes were freehold.

"It takes more work to sell leasehold property," says Cate, "so we charge commission on the freehold value of the property, or the leasehold plus a third. It's a method of calculating equivalent to the price being sold."