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Guide to leasehold property
Leasehold definition
Leasehold costs
Leasehold definition
A leasehold property is one where the buyer purchases the right to occupy a property for a specific length of time and subject to the specific conditions contained in the “Lease”. The length of time granted by the lease can be up to 999 years.
The leasehold ownership of a flat or apartment usually relates to everything within the four walls of the property, but does not include the external or structural walls. The structure and common parts of the building and the land it stands on are usually owned by the freeholder, who is also the landlord.
The landlord can be a person or a company, including a local authority or a housing association.
Many landlords appoint Managing Agents or a Management Company to deal with the day to day upkeep and on-going maintenance and repairs of the common parts.
What is a lease?
A lease is a contract between the leaseholder and the landlord giving ownership of the property to the leaseholder for a fixed period of time subject to strict conditions which are all written into the Lease. As the Leaseholder you should ensure you have a copy of the lease and it is recommendable to have it translated into plain English by either your lawyer or landlord so you understand all the terms.
The Lease will outline what you and the landlord are legally bound to do. Usually a leaseholder’s obligations include payment of ground rent and contribution to the costs of maintaining and managing the building. The landlord often has to maintain and insure the structure, exterior and common areas of the property.
As the leaseholder you have the right of “quiet enjoyment” for the term of the lease. In addition, you can expect the landlord to maintain and repair the building and manage the common parts. In other words any parts of the building/grounds, which do not belong to you, but to which there is common access such as lifts, stairwells, gardens and hallways.
Conveyancing on a Leasehold property
It is essential that your lawyer checks out the length of the unexpired term of the lease because many lenders will not provide a mortgage if a lease has less than 60 years left to run.
Your lawyer must also check the other conditions and obligations in the lease which may restrict the use, enjoyment and development of the property. If any extensions or alterations have been carried out or are intended to be carried out at the property not only will the planning conditions and building regulations need to be complied with but also any restrictions within the terms of the lease should be addressed.
Also remember that conveyancing on a leasehold property is often more expensive than on a freehold property. This is because there is an amount of additional work required in dealing with the landlord and/or management company to obtain information about whether the rent and service charges are paid to date and whether there are any large sums expected to be spent in the foreseeable future on repairs or maintenance of the building.
With a leasehold property there is one third party cost, which cannot be controlled or negotiated by your lawyer up front: the landlord’s charges for providing the information required by your buyer and for the consent to transfer the lease.
Share of freehold
Sometimes you will see a flat or apartment for sale which is shown as “Share of Freehold”. In reality the flat will still in all likelihood be a leasehold property but the lease is created by the “residents” who act as the “landlord” therefore each owner occupier takes on a share in the freehold of the entire building.
The advantages of owning a share in the freehold rather than leasehold subject to obligations to an external landlord and management company are:
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Freeholders can grant longer lease at reduced or premiums.
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Freeholders can get together and agree to vary the terms of the lease that might be causing problems.
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Freeholders can agree on who provides the services and can minimise service charges.
The disadvantages are:
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Not all freeholders may agree to certain decisions which may be difficult then to enforce (unlike if there was an external management of the property).
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Lenders may not like the arrangement and may not lend on this type of property so you should do your homework before embarking on such a purchase.
Freehold reversion
When the lease term expires the legal title to the property reverts back to the owner of the freehold. When we talk of buying the freehold reversionary interest in a property this is usually where the leaseholder (usually also the occupier) buys the freehold interest in the property which can be merged with the leasehold interest giving the owner an absolute freehold title.
Leasehold Costs
Ground rent
Ground rent is a regular payment by the leaseholder to the landlord or freeholder under the terms of a lease. Usually it is a small amount, such as £100 a year or is sometimes called ‘peppercorn’ rent which means no money is payable (historically a peppercorn would be the payment). Your lease will include details of the amount of the ground rent, how often it should be paid and to whom.
Your landlord will probably send you a reminder to pay but you should pay it even if you do not receive one. If you do not pay the Ground Rent then you can be taken to court by your landlord. If you have a mortgage on the property it is possible that the landlord will take the action up with your mortgage lender and recover the payment of rent arrears and costs from them who will in turn add this on to your mortgage debt.
Service charges
Service charges are payments by the leaseholder to the landlord for all the services the landlord provides. These will include maintenance, repairs and insurance of the building. Often the charges will also include the costs of management, either by the landlord or by a professional managing agent.
Service charges will vary from year to year and all costs must be met by the leaseholders with the landlord generally giving no financial contribution. However, the landlord can only recover the costs of services which are reasonable and leaseholders can challenge service charges they feel are unreasonable at the Leasehold Valuation Tribunal (LVT).
It is important you budget properly when purchasing a leasehold property. Find out what current and future service charges are likely to be and whether there are any major works that could affect the service charge in the few years after your purchase.
Reserve fund or sinking fund
Landlords often are able to collect money in advance of work to create a reserve or ‘sinking’ fund to ensure that sufficient money is available for future scheduled major works.