Buying a leasehold property
Leasehold is when ownership of a property is subject to lease from the freeholder (the owner of the land upon which the property sits).
Leasehold properties – usually flats – are leased for a fixed number of years, usually 99 years or more.
If you are thinking of buying a leasehold property there are vital questions that you need to ask at the outset.
Questions to ask:
Why leasehold?
Almost all flats and maisonettes are sold on lease. A freehold flat would be unattractive to lenders and difficult to sell. A well-drawn lease provides a workable management document that ensures your building is maintained, insured and that everyone pays their share towards service costs.
Why it is important to read the lease
Ask to see a copy of the existing lease. It will provide important information about the length of the lease, the amount of ground-rent, the calculation of service charges, and what restrictions will affect your occupation of the property. It will also contain floor plans showing what is being leased.
How long is left on the lease?
Although 99 years may seem a lifetime, what is left on a lease 40 years down the line looks unattractive to mortgage lenders and prospective buyers. As a rule of thumb, leading mortgage lenders will insist on a minimum unexpired lease-term equivalent to the period of the mortgage, plus 30 years.
This means is that if you apply for a mortgage repayable over 25 years, the lease you are intending to buy should have at least 55 years left to run.
If you are worried about the period left on a lease, ask whether it can be extended and how much that extension is likely to cost.
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How much is the ground-rent?
A ground rent is usually no more than a few pounds a year. It may be fixed for the whole term of the lease or there may be staged increases. For example, an annual ground rent may be £15 for the first 30 years of the term, rising to £30 for the next 30 years and rising again to £45 for the remainder.
Be wary of anything in the lease that links future increases in ground rent to the current market value of the property. For example, a provision increasing an annual ground rent to as little as 0.25% of market value would now cost you £500 each year on a flat worth £200,000.
What are the service charges?
A service charge is your contribution towards the ground landlord’s cost in maintaining, insuring and managing the block. The lease will specify what proportion you have to pay.
For a general guide to the level of service charges, ask for the previous three years’ accounts and study the itemised figures. Ask specifically about any recent works or improvements that have yet to be charged to leaseholders. Ask also about any works or improvements planned for the future.
What are the restrictions?
Common lease-restrictions prevent the keeping of pets, the hanging out of washing, loud music or the carrying on of any business. Almost all leases will prohibit alterations to the property without the written consent of the ground-landlord.
If you are buying to let, watch out for restrictions on subletting. Some leases also allow landlords to vet prospective buyers, which could delay any future sale.
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Who is the landlord?
The ground landlord may be a private investor, an institution (such as a local authority or housing association), or a management company owned by the leaseholders themselves.
The advantage of a leaseholders’ management company is that the leaseholders collectively have control of their own affairs and can make decisions on a democratic basis.
Many landlords also delegate the day-to-day management of the block to managing agents. Sometimes a separate management company will be set up specifically for this purpose.
Occasionally there is no contactable landlord at all. This might happen if the landlord has died or simply moved on without leaving a forwarding address. You then need ask what arrangements are actually in place between the leaseholders to ensure the building and its grounds are kept in repair, insured, maintained and managed.
By Charles Ward
More information
Charles Ward is a solicitor and freelance writer specialising in residential property.
He is the author of ‘Residential Leaseholders Handbook’, published through EG Books, priced £20. It explains in plain language everything leaseholders need to know in relation to long residential leases. Telephone 01865 474010 or visit the website.