If you’re buying a property, you need to find out whether it is leasehold or freehold as there are significant differences between the two.
A freehold property and the land it stands on is owned outright and yours to do what you choose with, but a leasehold property can come with restrictions on alterations, service charges ground rent and possible extra charges.
With a leasehold property, the buyer does not purchase it outright – as with a freehold property – but ‘leases’ it from the freeholder.
They own the right to live in the property for a defined period, but if it is a flat they do not own the building it is in, and if it is a house they do not own the land it stands on.
A leasehold flat is where the buyer does not own it outright but ‘leases’ it for a period of time
The length of a lease tends to range from 99 years to 999 years, but are most commonly 125 years from when a lease is first issued on the initial sale of a property.
When a property is sold again, the number of years left is also sold, rather than a new contract being drawn up.
However, the owner of the leasehold – known as a leaseholder – can ask to buy more years at any point, with most people trying to do this before the lease reaches 80 years.
Leaseholds have been plagued by a number of scandals in recent years, including the doubling of ground rents and restrictions on renovations.
A report by the Law Commission has recommendeded reform in the leasehold sector.
It put forward a range of options to make it cheaper for leaseholders to buy their freehold or extend their lease.
However, the Law Commission doesn’t hold views on which scheme and which other options for reform should be adopted, saying that this is ultimately a decision for the Government.
In the meantime, if you’re looking to go ahead and buy a leasehold, Helen Marsh, a partner at law firm Forsters, provides six top tips for avoiding some of the most common pitfalls of this type of property.
Six tips if you’re looking to buy a leasehold property
In other words, this is how long does the lease have left to run?
Ms Marsh explained: ‘This is a significant factor in terms of valuation. You can almost always extend your lease, but you usually have to pay to do so and the cost is considerably more if the remaining term is less than 80 years.
‘A short lease can negatively impact the value of a property as a result.’
Leasehold properties often come with an obligation to pay an annual rent.
As well as checking what this is, you need to check what the rent increases are set to be, according to Ms Marsh.
Some increase in line with inflation (the retail prices index), some have fixed increases and some double every few years.
Ms Marsh added: ‘Consider what effect this will have in terms of affordability of the rent. What may seem small now may become unaffordable if doubled a few times.
‘While you may be able to pay the rent now, an increase in ground rent may put a future purchaser off.’
In addition, mortgage lenders are also becoming stricter on what they will accept in terms of rent. Many will not accept a rent of more than 0.1 per cent of the value of the property and rental increases.’
3. Service charge
The service charge covers the cost of the buildings insurance and maintenance of the exterior and common parts, which is done by the landlord.
Every leaseholder has to contribute, Ms Marsh pointed out.
She said: ‘You should ask what the annual service charge is currently, what it has been for the last few years, and if any significant increases are expected.
‘Also check whether there is a reserve fund for future capital expenditure – such as roof repairs or a lift replacement – as this will help with the cost of those items when they arise.’
4. Share of freehold
Some leasehold properties also come with a share of the freehold, which means that the flat owners jointly own their freehold.
Freehold is the permanent and outright form of ownership of land.
Ms Marsh explained: ‘There are obvious advantages to this, such as, more control over the service charges and running of the building, and the likelihood of cheaper lease extensions if required.
‘However, you may prefer not to have to be involved with the running of the building, which will necessarily mean making joint decisions with your neighbours.
‘Using a professional landlord, or managing agent, will mean less of your time and attention is required. You should therefore consider whether you value control or convenience more.’
5. Does the lease allow you to make alterations?
You need to check what things require consent from the landlord? To protect the structural integrity of the building, leases usually require consent for major works.
And will you need landlord consent – which can be expensive, and delay your works – to other changes to the flat?
‘If the lease is restrictive it can be difficult to make the changes you want,’ advises Ms Marsh. ‘Furthermore, recent case law limits the ability of landlords to waive those restrictions, even if they are happy to do so.’
6. Check the lease plan against the property itself
You need to check the lease plan against the property itself to make sure that everything you are expecting to get is ‘legally demised’.
The term legally demised means that it is part of the property contained within the lease.
For example, it is not unusual for some space – such as loft space or a cupboard – to be used as part of the flat but not actually be legally part of it.
Ms Marsh said: ‘This can be very complicated to resolve, so make sure you know about it in advance.
‘It is also a good idea to check that the current layout matches the layout showing in the lease plan.
‘If there are changes, you also need to check if these are approved by the landlord – if necessary. If they were not, you risk the landlord insisting that the changes are undone and the flat reinstated to its previous condition.’