Buying a Leasehold Property Explained

Mortgage Matters: Leasehold properties have come under fire for confusing contracts and extortionate ground rents. Here's what you need to know if you're buying a leasehold property 

Faith Glasgow 29 March, 2021 | 10:35AM
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Leasehold property ownership has endured some bad press over the years, most recently around extortionate ground rents charged on newbuild houses. But what is actually involved in buying a leasehold property, and what, in practice, do leaseholders need to keep an eye open for?

What is a Leasehold?

If you buy a flat, it’s likely you’ll be buying it on a leasehold basis (though some owners own a share of the freehold). That means that although you own your property, there is a time limit on your ownership. This is the length of the remaining lease from the freeholder, who owns the ground and the common parts of the building.

Typically the freeholder will be the builder or the person or firm to whom he has sold the freehold. The freeholder may appoint an agent to manage the property’s communal areas, including garden, roof and lift maintenance, and stairwell decoration.

Leasehold ownership is most common in apartment blocks, but it can also apply to homes on newbuild estates, where there are communal grounds or management is required.

Clearly, leasehold is a more complex ownership arrangement, because there’s another party involved in your ownership. The rights and obligations of each party are set out in the legal contract you’ll sign when you buy the property. This will cover issues such as the maintenance charge and ground rent, who pays for repairs to common parts, what you’re allowed to do to your unit, and a great deal more.

Jeremy Leaf, a north London estate agent and former RICS chairman, says that although things can go wrong, it’s usually to do with specific legal, structural or rent issues. “Leasehold works perfectly well in the overwhelming majority of cases,” he says.

Buyer Beware

The key, says Leaf, is therefore to be aware of “the potential for conflict” before you buy. Try and get answers to questions such as: Are there repairs outstanding? What is the track record for the block or estate? What work has been done in the past three or four years? What’s planned for the next three or four years? What’s the likelihood of issues arising and how have they been dealt with in the past?

Perhaps the most high-profile and controversial potential risks of leasehold homes are around the costs associated with unsafe cladding and wider fire prevention measures.

While such questions are likely to be on the checklist of the solicitor doing your conveyancing, Leaf recommends doing some research yourself if you’re interested in the property, to keep costs down and speed the process up: "You can find a lot of information on the internet, ask people in the building, ask the building owner or management company. Look at what the maintenance charges cover, and what they don’t."

He adds: “In my experience, most of the time the freeholder is very happy to volunteer the maintenance records, particularly if they’re in good order. It only becomes tricky when there’s something to hide.”

The other key consideration for buyers is the length of the leasehold. While newbuild properties normally have leases of 125 years and in some cases 999 years, older properties may have shorter leases, typically between 99 and 125 years.

Length of Lease Matters

Once a lease has less than around 80 years to run, lenders and estate agents start to become concerned about the value of the property relative to others with longer leases, and you should tread very warily.

Lenders’ terms will become less favourable or the valuation may be reduced; they won’t normally lend at all on properties with less than 70 years left on the lease. It’s well worth being clear about your lender’s policy on lease length before you go home-hunting.

It’s also important to double-check the lease details on the property particulars are correct if they’re around the 80-year mark, warns Leaf: “The remaining lease length should be accurate, but it may not be." Buyers need to be sure very early on in the process what is actually left on their lease, because such properties rapidly become less saleable or mortgageable.

If there are around 80 years left, one option may be to ask the seller to start the process for a lease extension before you buy, and agree to split the cost. Lease extension is now a legal right and is common practice. However, you need to have owned the property for at least two years before you can extend. Moreover, it can cost quite a lot, and those costs rise as the remaining lease becomes shorter.

The annual ground rent payable and whether the rent review clause allows for increases during the term of the lease will affect the extension premium payable. Assuming a property would be worth £250,000 with a long lease, and has a fixed annual ground rent of £100, the premium payable with 85 years left on the lease is around £5,400, according to sums by Leaf. But the figure could be higher if there is an onerous ground rent pattern - for example, the horror stories of ground rents doubling every few years until the annual charge is tens of thousands of pounds. 

Those with a lease of less than 80 years should be aware of the "marriage value", whereby the freeholder is entitled to half of the increase in the value of the property when a lease of less than 80 years is extended. The same £250,000 property as the above example, with 79 years remaining of the lease, would likely see a preium of more than £16,000 before fees. 

Changes to Leasehold Rules

Proposed changes to the law announced in January mean the leasehold system is set to become fairer. The new proposals have yet to be discussed in parliament, but under them, both house and flat leaseholders will be able to extend their lease to  a new standard  length of 990 years, with a ground rent at zero.

The government is also keen to encourage a "commonhold" model of ownership, whereby blocks of flats or houses are jointly owned and managed by their owners, though this has not proved particularly popular to date.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Faith Glasgow  Faith Glasgow is a freelance journalist specialising in pensions and investment trusts