What is a leasehold property?
‘Leasehold’ properties can be confusing when buying, as the legal structure of ownership isn’t as simple as buying a freehold property.
A key difference with leasehold property is that you would own the property for a specific length of time, known as a “term”. Once this time is up ownership would return to the freeholder unless the lease is extended.
It is more common for flats and maisonettes to be leaseholds, where you own the property but not the building it is in. However you can get houses sold as leaseholds, in these situations you would own the house but not the land it is built on.
As well as containing the term, leasehold property usually comes with a requirement to comply with various terms and conditions contained within the lease. There are a number of key elements that buyers need to consider when purchasing a leasehold property, and we’ve detailed below the most important factors to consider and understand before committing.
The length or ‘term’ of the lease
Understandably, the length of the lease, or how long the lease has left to run, is of paramount importance when considering a leasehold property.
It stands to reason that if you are planning on buying a leasehold property, you will want to know how many years remain on the lease.
Leases are typically ‘Long Leases’ with average terms ranging from 90 to 120 years, though often leases can be as long as 999 years. Leases start from when the property was first sold, and the remaining years left of the lease are known as the ‘remaining term of the lease’. The reason it is so important is that the value of the property can reduce if the lease is shorter, and in some instances securing a mortgage can be difficult. So, as a prospective leaseholder, what should you do?
As a rule of thumb look for leases that have over 90 years left, and if the remaining terms is less than this, you should find out if the lease can be extended. It is worth taking into account that if the lease has below 80 years remaining the cost of renewing will be higher, as it will include an extra payment known as the ‘marriage value’ that is paid to the freeholder.
Ground rent
A leasehold property doesn’t own the land it is built on, and this means that a rent is due for the ground it uses – hence the term ‘ground rent’. It is important to understand two key elements here, firstly, how much you will need to pay in ground rent currently, this can sometimes be a nominal amount, but can just as easily be several hundred pounds, so ensure you have this included in your property costs. The second element to consider is how much ground rent can increase in the future. All the details will be laid out in the lease, and your conveyancer can provide details on the impact this could have.
How much are service charges and other fees?
When you buy a leasehold property, you will typically need to pay a service charge which is used to maintain, manage and repair the building in which the leasehold property resides.
How much you need to pay and to whom, as well as the landlords’ obligations should all be set out in the lease, so you will have full transparency before committing to any purchase.
Services that are typically included in this charge include general maintenance, heating and electricity for communal areas, lifts, building insurance and cleaning staff costs. They may also include contributions to a reserve fund. Reserve funds are needed to cover one-off or unexpected costs such as replacing or repairing a lift, or decorating the outside features of a building.
Are there any planned alterations or building works to consider?
It’s important to check whether there are any planned changes or substantial building works planned as these could mean unexpected additional costs. Ensure you ask for details on any building works with particular emphasis on how the funding has been set out, namely whether funding has already been secured (for example through a reserve fund), or whether you, as a leaseholder will need to provide additional capital to cover the costs of the work when undertaken. It’s really important to get as much detail on this as possible and your conveyancer can check with the freeholder or managing agent – the costs of works can be high and it’s important you know what your obligations will be.
Administration costs
More often than not, the freeholder will employ a management agent to deal with the relationship between the freeholders and leaseholders, organise maintenance, prepare accounts and arrange buildings insurance. It’s important to check any administrative costs that are applied to any elements of this relationship..
Any additional restrictions or covenants?
In addition to the standard terms of a leased agreement, it is vital to review the details of the lease for any specific requirements. In some cases, restrictions might not affect you now but could do in the future. As an example, some leaseholds won’t allow you to have pets, so even though it may not be part of your lifestyle now, it may cause difficulties in the future.
These restrictions are known as covenants, and you should check the lease thoroughly for anything which concerns you, as both the leaseholder and freeholder will be bound by these terms once a sale has been completed. Covenants can be ‘positive’, for example requiring you to actively contribute to a reserve fund for future maintenance, or ‘restrictive’, which literally restricts you from doing something, such as using the property for business, building extensions or alterations or, as mentioned earlier, keeping pets.
Obviously these covenants can put off some prospective buyers, so think carefully not only about your circumstances, but also whether you think any covenants would put off future buyers if you wanted to sell your property. If you’ve read this far, you’ve probably come to realise that leasehold property purchases can be more complicated than freehold, and if you’re unsure about anything or need advice, please get in touch with us to learn more.
