You’ll probably be aware that leasehold properties usually come with ground rent and service charges, but it is worth also knowing all the other implications of buying and owning a leasehold property. There are two key things to understand which affect your finances and how you (or your tenant) lives in the property. This makes choosing buying a flat versus a house, which tends to be freehold, a big decision, so it is worth making sure you are aware of the differences so your choice is well informed.
Broadly speaking, houses and other detached properties tend to be freehold, while flats and maisonettes are usually leasehold. A freeholder owns the land on which the property stands and you pay them an annual ‘ground rent’. Your lease will be a fixed term – usually either 125 years or 999 years at the point it’s drawn up – and when the term comes to an end, the freeholder has the right to regain possession of the property.
In reality, a freeholder taking back a property is pretty much unheard of. That’s because the vast majority of leases get extended, either by individuals separately or through all the leaseholders in a building collectively buying the freehold and changing their property’s status from ‘leasehold’ to ‘share of freehold’.
This is something that’s becoming more and more common and there are two very good reasons for extending a lease before its length drops below 80 years:
- Most mortgage companies won’t lend on a property with a lease of less than 75-80 years, so it can affect the property’s value.
- Who the property can be sold to reduces to cash buyers only, so its value and future are more uncertain.
The cost of extending the lease length varies greatly, so it is worth seeking specialist legal advice prior to purchasing or before you need to extend it. We’d suggest you speak to someone who’s a member of the Association of Leasehold Enfranchisement Practitioners (ALEP). ALEP represents conveyancers and other property professionals who specialise in the residential leasehold sector and makes sure they’re properly vetted. You can find out more about Your Move conveyancing here.
The precise terms of each lease will be different from property to property, but over and above regular charges and the lease length, here are some common restrictions and issues to be aware of.
Common restrictions on leasehold properties
Two restrictions which are often in the lease are not being able to operate a business from the property and no pets being allowed, particularly dogs. This can restrict the number of tenants that can rent your property to, especially as much of the employment growth we have seen over recent years is due to an increase in self-employment. The lease could also state you can’t sub-let rooms within the property or even let the property at all – so something worth checking with the selling agent before you view or make an offer on the property. There could also be a clause that means you can’t let to students.
Other things your tenant’s might not be allowed to do while living in the property include: hang washing outside in communal areas, play ball games within the grounds and converting a garage to another use. It is also likely that there are clauses which even restrict the colour of the external doors and/or the type of door you fit, which may have to comply with latest fire regulations for flats.
Finally, one common problem which doesn’t always get confirmed until after purchase is the parking situation, so always check whether the property comes with an allocated parking space, or if it simply ‘first come, first served’ in a communal area? And if there’s a garden, is it entirely communal, or do you have a private outside space to manage?
Check how healthy the freeholder’s finances are
There are important financial considerations to be aware of too. Many leasehold properties have a maintenance fund that all the owners pay into, called a service charge. This covers things like lighting and cleaning for communal areas, gardening, painting of the exterior of the building and any ‘every day’ repairs, but doesn’t necessary cover major repairs – for example replacing the roof or windows. When you buy leasehold, you’re responsible for everything inside the property and the management company is responsible for securing the maintenance on the outside, but is still likely to seek to recover the costs from you. As each lease agreement can be different, your legal representative needs to thoroughly check out exactly what state the property management company’s finances are in, when major repairs were last carried out and – most importantly – whether there’s an adequate ‘sinking fund’ for future repairs.
Ask the neighbours!
A great way to reassure yourself if the management company/freeholder is doing a good job is to talk to some of the other owners in the block and find out how everyone works together. Does a 3rd party manage the block or do all the owners form the management committee? Ask what the freeholder is like and how the management company operates. Also, check how many owner-occupiers there are in the building and how many of the properties are rented out. If a lot are owned by landlords who live some distance away, it may make it more difficult to have effective management meetings which are required to maintain the property and retain or grow its value and rental income.
Lastly, make sure you’re aware of all the likely costs and when charges are due, so that you can put together an accurate budget and know your investment is going to give you the returns you need. Ask your conveyancer or legal company to find out when an increase in ground rent or service charges are likely and how much they could go up by, so that you’re prepared and nothing comes as a shock.
If you’re considering buying a leasehold property and want to discuss whether it’s the right kind of investment, come and speak to us. We’ll be happy to answer any leasehold questions you might have. Find your local branch, call 0845 450 5507^ (calls cost 2 pence per minute plus your phone company’s access charge) or email Landlords@Your-Move.co.uk.