13 Jul Leasehold vs Freehold property | Pros and Cons
Source NZ Herald: This article has been sourced for you by the conveyancing team at Auckland Law firm Quay Law | Remuera | New Zealand. 13 July 2013
The owner of a $2.1 million Auckland house has abandoned her property, after leasehold payments skyrocketed from $8,300 a year to more than $70,000.
The nightmare over the home on its huge leasehold site at the foot of One Tree Hill went to court but has not yet been resolved.
The case has implications for others who own properties on leasehold land.
Neighbours expressed horror about the situation, saying they now feared massive increases in ground rent and others abandoning their houses in the desirable, leafy area.
In 2005, Young Xin Chen bought 21 Maungakiekie Ave, on the edge of Cornwall Park, for $450,000.
But the 1,297sq m site is owned by the Cornwall Park Trust Board, which charges residents ground rents, so she owned only the house, not the land.
She bought the property knowing she had to pay ground rent.
But just three years later, the board wrote to tell her the rent was rising in accordance with the terms of the lease, which has a 21-year review period.
It said that based on the property’s valuation, the ground rent would rise from $8,300 a year to $73,750 from March 2009.
She baulked at that huge increase and eventually left the home, but now the board is chasing her for almost $350,000.
The case went to the High Court at Auckland, where the board asked Associate Judge John Faire to order Ms Young to pay $348,284 for various costs incurred over the debacle.
Via her lawyer Jennifer Wickes, Ms Young claimed she never got two letters – sent in December 2008 and March 2009 – outlining the situation and telling her that the ground rent would rise.
She continued to pay her original rent and attempted to negotiate with the board over the big increase.
In a meeting in August 2011, she tried to get the board to freehold the site or reduce the ground rent.
She was unsuccessful, so left the property in November 2011 and is now understood to be living elsewhere in Auckland.
The board then tried to sell her house and spent $7,557 marketing and auctioning it.
No one wanted to buy the place so the board decided to renovate it and rent it out to generate an income while it sorted out the fight.
Renovations cost $167,404, which the board wants to recover from Ms Young, as well as the unpaid ground rent of $173,323.64.
The judge refused to award the board the $348,284 it sought, saying there were many different issues to sort out so the case should proceed to trial.
There are hundreds of hectares in Auckland under leasehold tenure, which many people have decried.
Large parts of Kohimarama, Quay Park, Princes Wharf, the Viaduct and Wynyard Quarter are leasehold.
Alistair Helm, a property commentator, said the One Tree Hill case showed the importance of people doing due diligence.
There was a reason a multi-million-dollar property sold for less than $500,000, he said.
“Something should (have) sent some signals. You are not buying the value of the house. You are buying the right to use the land,” Mr Helm said.
Joanna Pidgeon of Pidgeon Law said leasehold land was often sold when rents were low.
“If people did proper due diligence, they would be advised that when it went to the next rent review, it would increase a lot,” she said.
“If you’re on a fixed income, your income is not necessarily going to cover it.”
The pros and cons of Leasehold versus Freehold property titles.
• Lessee buys house but not the land.
• Lessee rents land from the lessor (ground owner).
• Lessee pays regular ground rent.
• Conditions sometimes apply for house upkeep.
• More common than leasehold.
• Homeowner owns house and land.
• No ongoing obligations to pay any other parties.
• Freehold title may become leasehold to provide rental income following sale of the buildings.