A leasehold property can be a secure investment for your future on the basis that the lease is well written and the property management arrangements are reasonable.
However, purchasing a leasehold interest differs from freehold ownership and requires a number of careful considerations.
What are the basic differences between a freehold and a leasehold property?
Purchasing a freehold property means that you own the property outright including the land that it stands upon.
Purchase a leasehold property means that you own the property for a fixed term but not the land upon which it stands. The land generally remains with the freeholder or landlord who created the lease. You agree to the terms of the lease granted by the landlord.
The sales particulars of the property you are considering should make clear which type of ownership is being sold. Generally, most houses in the UK are freehold and most flats are leasehold.
What is a lease?
A lease is a contract between a leaseholder and a landlord. A landlord will generally manage, maintain, insure and repair the building structure, common parts and exterior subject to receipt of service charge payments and ground rent.
A leaseholder will generally agree to keep the property in good order, agree not to do certain things such as to keep animals, sub-let or to make structural alterations without the landlord’s consent and agree to pay any ongoing payments under the lease such as service charge and ground rent.
Is the length of the lease important?
Lease lengths vary. Generally, lease terms of 99, 125 or higher are considered normal in respect of a new build leasehold property.
Your mortgage lender may stipulate a minimum length of lease such as a minimum unexpired lease term remaining of 75 years before issuing you with a mortgage. You will need to ensure you are fully aware of the remaining term left on the lease and that it is suitable for your mortgage lender.
Can I extend my lease?
If you own a leasehold house subject to a long lease, provided that you have held the lease for at least two years you will have the legal right to extend your lease by 50 years.
If you own a leasehold flat subject to a long lease, provided that you have held the lease for at least two years you will have the legal right to extend your lease by 90 years. In addition, you have the right to have any ground rent, payable under the terms of the lease, reduced to a peppercorn rent (effectively nil).
If you are purchasing with the intention of extending your lease you will need to budget for any premium together with associated professional costs.
What does share of freehold mean?
If you are purchasing a leasehold property which is described as a having a share of freehold this means that as well as purchasing the leasehold interest you will also be buying the seller’s interest in the freehold title.
In this scenario, you will usually find that a specific company has been set up to hold the freehold interest in the building in which your property is situated. Each leaseholder who has a property within the building will become a member of the company upon completion of the purchase of their leasehold interest.
This can be advantageous as you and the other leaseholders will have more control over how the property is managed and can make decisions, such as agreeing to extend the length of your leases without applying a premium.
Can I purchase the freehold during my ownership?
If you have owned a leasehold house for a minimum of two years, you can purchase the freehold interest. You will need to serve notice on the current freeholder and the price is then negotiated between the parties.
If you own a leasehold flat the process is more complex. The freehold building is likely to contain multiple leasehold properties and therefore the freehold can only be purchased by a collective group of leaseholders. The process is known as collective enfranchisement. There are specific qualifying criteria, the detail of which is beyond the scope of this article. Professional advice should be sought in advance.
Are there any restrictions?
The lease will include a number of restrictions which you must comply with. It is important that you read these carefully. If you do not comply, the landlord will be able to take enforcement action against you. These restrictions typically include not being able to keep any animals at the property, having to decorate the property periodically, not to sub-let and not to carry out any structural alterations.
If you are purchasing an existing lease, you should ensure that the seller confirms that they have not breached any of these restrictions. If they have, it is essential that they remedy the breach or obtain retrospective consent from the landlord otherwise you could be liable to enforcement action as the new owner.
What are service charges?
The service charge is a fee which the leaseholder pays to the landlord to cover their share of the cost of maintaining the leasehold property. This can include decorating the common areas, cleaning the windows, buildings insurance and repairing the roof. The lease should specify your percentage contribution to the overall costs.
There will also be a charge for managing the building and this is normally performed by the landlord or an external management company.
The service charges for a leasehold property vary depending on the terms of the lease. It is important that you are provided with a summary of these payments and understand how they may be increased in order that you can budget accordingly. It is also vital that your solicitor ensures that all arrears of service charge are cleared before you purchase.
Can you challenge the service charges?
The landlord is obliged to carry out certain services and, as a leaseholder, you have a responsibility to pay for these services. Whilst the landlord is not obliged to secure the cheapest service, he is responsible for ensuring that the costs incurred are reasonable.
You are entitled to request invoices evidencing the costs incurred during any service charge period to enable you to obtain equivalent estimates and assess whether you are getting value for money.
If you are ultimately unhappy with the charges levied, you can make an application to the First Tier Tribunal for a determination as to their reasonableness.
What is ground rent?
Ground rent is a fee which the leaseholder pays to the freehold owner to rent the land upon which the leaseholder’s property stands on. The charge can range from a “peppercorn” which equates to no charge, to as much as thousands of pounds depending upon the terms of the lease. The lease may contain a provision for the ground rent to increase on specified dates during the term.
It is important that you are aware of these payments and understand how they may be increased in the future.
There has been recent controversy concerning developers selling new build houses as leasehold properties. It is likely that following a government consultation that legislation will be introduced banning the sale of new build leasehold houses.
What is a sinking fund?
This is a fund set up to cover major works or emergencies such as replacing communal boilers or the roof. You should ensure that your solicitor obtains details of any notice of forthcoming major works and confirmation of whether the sinking fund has sufficient amounts to cover the costs.
Are there any other charges?
Most buyers are unaware of other charges involved in purchasing a leasehold property. These can include having to pay for a notice of transfer (payable for adding a new owner) and a notice of charge fee (payable for adding a new mortgage lender).
When selling a leasehold property, the landlord may charge a fee for providing a management pack. This pack includes all the information required from your buyer’s solicitors. The pack often includes information in relation to service charges, maintenance, buildings insurance, fire risk documents and proposed works. This fee is often a few hundred pounds but can vary depending upon the landlord.
The lease may also contain clauses which result in you having to pay a fee to the landlord to obtain their consent to a restriction in the lease. For example, obtaining consent for an alteration. Once again, these fees can vary depending on the terms of the lease.
Be vigilant and well informed with regard to other potential charges in respect of leasehold properties that may arise in the future.
As always, take professional advice from specialist property solicitors before buying a leasehold property and do not hesitate to ask questions.
Should you require any further information regarding this article or the services provided by Lawcomm Solicitors, please do not hesitate to contact Bill Dhariwal (E: firstname.lastname@example.org) or Maxwell Green (E: email@example.com).