Buying a Leasehold property? Did you know…

If you own a freehold property it is legally yours until you sell it but if you are buying a property that has a Leasehold title there will be an agreement with the Freehold owner (Landlord), in which a fixed term of ownership is granted to you or the previous owner. This means that your right to occupy the property is for a temporary period only. Most flats are Leasehold but some houses can also be Leasehold.

These are some of the important issues to consider in leasehold purchases:

TERM

Whilst some Leases are granted for a long period of 999 years, at some point in the future the term of a shorter Lease can reduce to a point at which it might have an adverse effect on the value of the property and saleability. Most mortgage lenders insist on there being a minimum term of approximately 70 years remaining on the Lease and if this is not the case, a Lease extension is usually required, which can cause delay and incur additional costs.

You have a statutory right to extend your Lease if you have owned your property for more than two years but in some cases, the extended term is negotiated privately with the Landlord or its agent.

In some cases, you and the other tenants may have the right to acquire the freehold title to the property subject to meeting qualifying criteria.

The costs associated with Lease extensions and freehold purchases can vary but are sometimes considerable and so if you are a Leasehold owner it is better to consider putting everything in order in good time before selling or, if you are buying a Leasehold property, ensuring that the seller attends to matters prior to selling to you.

GROUND RENT

This is a regular, usually annual, payment made by you to the Landlord, under the terms of the Lease. Some Leases have a fixed ground rent and others have an escalating sum or simply a peppercorn rent which effectively means that no ground rent is payable.

If the ground rent rises above £250.00 per annum (or £1,000.00 in Greater London), there is a risk that your Lease could be classed as an Assured Shorthold Tenancy and the Landlord could try to bring the Lease to an end and take possession of the property under the rules governing Assured Shorthold Tenancies. In those circumstances, you would not benefit from statutory protections. Mortgage lenders, therefore, view escalating ground rent as high-risk and onerous and may require a Deed of Variation before agreeing to lend money to you to complete your purchase.

However, the good news is that The Leasehold Reform (Ground Rent) Act came into force last year and put an end to ground rent for new Leases (except for retirement home Leases which will take effect in April 2023). The only ground rent which can be charged in future is a peppercorn rent.

The change in the law will also benefit people who want to extend their Lease as the ground rent can be reduced to zero.

SERVICE CHARGE

These are sums payable to the Landlord or Management Company for repair works, maintenance and improvements to common parts of the block or estate. The extent of the contributions required from you will be set out in the Lease.

Service charges will vary from year to year, and may decrease or increase and so it is important to budget accordingly and be aware of your obligations.

At the beginning of each year, a service charge budget will be issued and the service charge will be collected from you in advance of the actual accounts being issued at the end of the year. This might mean that there is a further balancing charge payable by you depending on the actual expenditure that year.

An additional charge called a sinking fund may also be collected from you for larger or unexpected works in the future.

You must pay the service charge (and any other sums payable under the Lease) on demand. Failure to make such payments may result in late payment fees, interest as well as legal action and, although rare, your Landlord might have the right to bring your Lease to and (forfeit your Lease).

RESTRICTIONS ON USE

It is important to be fully familiar with the covenants and conditions set out in the Lease to ensure that you are able to use the property as you intend to. For example, if you are purchasing a property to subsequently let it to a sub-tenant, then you must check the Lease to make sure that this is permitted. Common covenants prevent the playing of loud music in flats past a specific time, prevent the keeping of animals in a flat or carry out works to the property without permission from the Landlord. These are just some examples and you should read the proposed or existing Lease carefully.

There are often additional rules and regulations, in addition to the terms set out in the Lease, put in force by the Management Company or Residents’ Association.

FIRE SAFETY & CLADDING

It is a legal requirement that a Fire Risk Assessment is carried out of the common areas of buildings containing flats. You can report a potential hazard or risk to your Landlord and the appropriate action should be taken or the Landlord risks facing enforcement action.

Owners of flats in buildings containing failed cladding were usually responsible for the costs of the removal and this issue has been widely reported following the Grenfell disaster, not only because of the safety issue but the heavy financial burden placed on homeowners.

Under the Building Safety Act 2022, the Government announced plans to remove the burden from the qualifying leasehold property owner and insist upon developers and cladding companies foot the bill, a welcome relief to the many Leaseholders who were previously unable to sell or mortgage their property.

When purchasing a flat it is therefore vital that the up-to-date Risk Assessment is provided to the buyer.

SUMMARY

When purchasing a leasehold property it is vital that you discuss any concerns with your solicitor at the earliest possible stage and ensure that you are aware of any potential issues that may arise during the buying process or indeed following the completion of your purchase or upon re-sale of it.

If you have any questions in relation to the above or require further information, please email Jenna Hoban: jhoban@tmjlegal.co.uk.