Leasehold property is owned for a fixed period of time. There is a legal agreement with the landlord (referred to as the freeholder or lessor) known as “a lease”. The lease provides for the number of years you’ll own the property and sets out the rights and obligations between the landlord and the owner of the leasehold interest (referred to as the tenant or lessee).
It is usual under the terms of a lease that the tenant, pay both ground rent and also a service charge.
Ground rent is usually a specified amount which can increase, or it may be a ‘peppercorn’ i.e. none payable. Ground rent is paid to the landlord or alternatively to their managing agent i.e. they may employ a company to collect ground rent on their behalf.
Service charge is payment made in respect of services the landlord or the management company provide in relation to, for instance, cleaning of the common areas, insuring the building, repairs to the building. It can also include an element of ‘sinking fund’ contribution i.e. a sum put by towards any major repairs or works required to the building. The lease should specify the share of service charge you will be required to pay.
As the term of the lease decreases, the value of the Property may be adversely affected because the lease is effectively a wasting asset. Once a lease falls below 70 years it can become more difficult to sell as lenders will not offer mortgage finance once the number of years falls below a certain amount. This varies from lender to lender. You will acquire a statutory right to extend the lease after 2 years ownership though you will need to pay a premium for this alongside the landlord’s reasonable costs.
Advantages and disadvantages to owning a leasehold property
|More affordable – the initial premium payable tends to be less given the majority of leasehold properties are flats and so owning one may be the first step on the housing ladder for some.||Ongoing costs - there is usually a ground rent payable per annum. The amount or method of calculation will be identified in the lease.
There will be a service charge to pay – this is usually payable either monthly, quarterly or half yearly. Again the share payable will be identified within the lease.
Failure to pay may breach the terms of the lease and if this were to occur the landlord could take steps to forfeit the lease.
|It is the landlords responsibility to maintain the building, carry out repairs, works etc. to the main structure. You should therefore only need to carry out works to the extent of the property you are purchasing and will not need to organise maintenance of any common areas.||Some landlords, management companies see their interest as a ‘cash cow’, charging high administration costs, setting up companies who they then employ to manage the building (whose charge for this will be included in your services charge) etc.
Further issues regarding administration charge are included in the section below.
|For some people a retirement leasehold property with wardens/care manager is not just preferable but is needed to assist with care arrangements. Schemes such as these usually have common areas and a sense of community – some even have an onsite bar, gym etc!||There are some landlords/management companies who simply do not carry out their responsibilities effectively, efficiently or even at all. This can cause problems and mean the leaseholders have to take over these responsibilities.|
Leasehold properties in the news
Leasehold properties have been in the news of late, below is a brief summary of some of the issues being reported on:-
Following the tragic fire at Grenfell Tower, the light has been shone on the issue of fire safety.
As part of our job, there is the need to ensure evidence as to building regulations is obtained, and to also ensure there is an adequate fire safety assessment. The difficulty, is that blocks of flats with both building regulations approval and adequate fire risk assessments are now being found as having cladding which needs to now be removed (as it had not been previously known this cladding was dangerous).
Leaseholders are finding they are unable to sell their flats because the cost of removing the cladding is extremely high and landlords are seeking to recover these costs from the leaseholders. BBC’s The One Show recently did an interesting segment showing leaseholders in London facing bills of tens of thousands of pounds.
When you come to sell your leasehold property certain information needs to be obtained from the Landlord and/or Managing Agent. They charge for this information. Sometimes the charges can be reasonable perhaps less than £100 plus VAT. However, they can also be extremely high upwards of £300 plus VAT with (depending on how management is set up) the need for perhaps 2 packs.
When purchasing a leasehold property it may be necessary under the terms of the lease for certain notices are required to be served on the landlord/management company or both and there can be fees per notice payable. If you are having a mortgage separate notices with their own fees may also be needed. It is also possible they may require certain Deeds of Covenant entering into, again which may attract their own fee. On a recent leasehold purchase I undertook a client ended up paying more than £650.00 in notice fees.
The Government issued their Housing Whitepaper in February 2018 and one of the aims is to regulate the associated administration cost linked to leasehold properties.
If you have any queries on which you feel are not answered above, please do not hesitate to contact our Conveyancing Team on 0800 1615788 or contact us and someone will be happy to assist with some free initial advice.