Leasehold properties: What you need to know before you purchase
Written By Matthew Price of Peter Barry Surveyors & Matthew Barrett of Thirsk Winton LLP
There are many things to consider when deciding whether to purchase leasehold property. Such properties are, by necessity, burdened by greater legal and valuation complexities and it would be easy to reach the conclusion that the purchase of a freehold property would be favourable. The problem here, of course, is that the simplicity and desirability of a freehold property often results in a substantially higher price tag.
As with so many things in life, it pays to do your research and be aware of the short, medium and long term implications of purchasing a leasehold property. As one might expect, ignorance is no excuse should you find yourself in breach of your lease in a few years’ time having innocently believed you could do whatever perpetrating act has caused the breach.
This article aims to provide a short summary of the main factors you will need to keep in mind when purchasing a leasehold property by taking into account the primary factors we examine as legal and valuation professionals.
A lease grants you exclusive possession of a particular area, typically a flat or maisonette on a single floor. Your lease will then stipulation how you may access the flat and utilise any communal areas within the building and grounds owned by your freeholder.
As with short term tenancies, your will also contain obligations and restrictions on what you can do during occupation. This, for example, might include restrictions on to whom you may sub-let it, for what you may use it and provide for you to maintain certain elements at your own cost.
You will need to get your head around how the ownership issues relate to your obligations as a leaseholder and, as is so often the case, your lease is the starting point. All of what follows will be outlined in your lease and while some of these will be easy concepts to understand, others will either be complex or just poorly worded and will require further explanation. Ignorance is not excuse. Not reading your lease is not like not reading your T&Cs for a new phone contract.
The ground rent is the annual charge you pay to your landlord for exclusive possession of your leasehold property. This varies by location, size and type of property. This ground rent should be considered “nominal” in size. Recent case law has confirmed such ground rent should not exceed £1,000 in London or it risks falling outside of acceptable limits to mainstream mortgage lenders.
Ground rents often double or are linked to indexes and if they are too aggressive they can devalue the property or even make it un-mortgageable with the Taylor Wimpey leasehold homes scandal being an unfortunate example of this. We can advise you on the impact of your ground rent. There is the possibility of undertaking a lease extension in order to extinguish the rent (a whole other topic in itself).
Most leasehold properties will carry with them an obligation to contribute towards an annual service charge. This is typically a charge made by the landlord in order to reimburse himself for costs expended in maintaining and insuring the building or estate. The level of such service charge will vary by development and it is important that your solicitor obtains full details from the landlord of your ongoing liability before you exchange contracts.
Your lender’s valuation will only inform them whether the loan represents a sound investment whereas a RICS Homebuyer report or a Full Building Survey will go into detail on the condition of the property and block which can flag up future costly maintenance issues.
Most leases of flats are considered, in law at least, to be “long”. That is to say, they will have been initially granted for at least twenty one years. In practice, it is common to find lease granted for fixed terms of 99, 125 or 999 years. There are, of course, variations to this since it is at the discretion of the landlord as to what term of years he is prepared to grant.
Whatever lease term your landlord has granted, it is critical to monitor the term remaining and ensure it does not fall below eighty years for mortgage and marketability purposes.
Whilst you can run a rough calculation, you will need to instruct a Chartered Surveyor to do a full valuation report which will confirm the price that you should expect to pay for your lease extension and a lower figure which the solicitor will use for their S42 notice. Most surveyors will also negotiate on your behalf to try and get the premium for the extension as low as possible.
Leases will generally either prohibit any form of structural alteration in leasehold properties. In the relatively small number of cases where such alterations are permitted, they will only be so once the landlord has given his written consent. In order to obtain this, often known as a “license”, you will need to convince the landlord that you are not jeopardising the value of their investment and will carry out the work responsibly. The landlord will usually charge a fee for providing the license.
Situations requiring such a license usually occur when a leasehold property is purchased without the buyer having first established the full extent of his demise. This, for example, should include a check of the ownership of any loft space, garden or external storage space.
If the freeholder can prohibit you from undertaking works then they may choose to charge a premium for providing consent. Likewise, if you propose to extend into an area that is not demised to your flat, the freeholder will need to sell you that space and will often require a development valuation. This is very common where the leasehold owner of a top floor flat wishes to extend in to the roof space.
In purchasing a leasehold property you will need to consider a number of points that do not arise when purchasing, say, a freehold house. The advice of experienced professionals is, in this regard, essential.
In choosing your conveyancer you should consider the following:-
You should not base your selection on price alone. To do so would, inevitably, result in a “no” to all three questions and this could prove costly in future.
The same is true of your surveyor. It is very unwise to rely on the bank’s valuation only and whilst a detailed Homebuyer report or Building Survey may cost you between £500 and £1,000, that is a fraction of the cost of rectifying defects that are found at a later date. An experienced surveyor will also understand the various valuation impacts and when it comes to lease extension, this is an entire field of expertise.
Peter Barry Surveyors and Thirsk Winton LLP are established firms in South Woodford and Woodford Green respectively. We regularly collaborate on all manner of property matters. If you require any advice, Peter Barry are on 020 8360 7615 or email@example.com and Thirsk Winton LLP are on 020 8505 4777 and firstname.lastname@example.org.