Purchasing Leasehold Property: 5 questions you should ask
As a prospective first time buyer, my 6 month seat in the residential property department has given me a real insight into the potential pitfalls of purchasing property, particularly leaseholds. Despite the recent horror stories in the press regarding this method of property ownership, it remains incredibly popular – particularly amongst first time buyers (although, with leaseholds usually being cheaper than their freehold cousins, this popularity can undoubtedly be attributed to economic factors).
Whatever the reason for their popularity, few would argue that leasehold ownership lacks complexity. If you are in the market for a leasehold property, here is my shortlist of questions you should consider asking before making an offer:
How long is left on the lease?
In many ways this is the most important question that should be asked, and is something that is far too frequently omitted from agent’s sales brochures.
Whilst the majority of leasehold properties are sold with decades left to run, once the lease drops below 80 years the cost of extending it starts to rise rapidly. It also becomes harder for potential buyers to be granted a mortgage.
It is easy to see how your greatest asset could quickly become your greatest liability, so most would recommend you look for a property with a lease that will not drop below that all important 80 year mark whilst you are living there. However, you should anticipate that your future buyer will have the same concerns as you.
Ultimately, if you do not want this issue to affect the future saleability of the property you should either look for properties with even longer leases or, alternatively, consider extending the lease before it drops below 80 years. If you opt for the latter, you should note that you will need to own the property for 2 years before you can qualify for a statutory lease extension. There are other alternatives:-
- Have the seller (provided they have owned the property for 2 years) start the lease extension process for you and have them assign the benefit of the notice to you
- Try to agree with the landlord to extend the lease informally either before or after the sale. However you should know that with this option, the landlord is under no obligation to grant an extension or transfer the benefit of an agreement to you
- Insist that the seller completes the lease extension at their cost before completion
As the bulk of estate agents are oblivious to the processes and costs properties with short leases are often valued without taking this into consideration so resulting in the properties being marketed at an inflated price.
How much is the Ground Rent?
By purchasing a leasehold property, you are effectively buying the remaining term of a long rental contract, you should expect to pay a small, usually token amount of rent per annum to the Freeholder. Whilst this is often no more than £100 – £200 per annum, you should watch out if your lease refers to an escalating ground rent (e.g. a ground rent that may well be £150 now, but will double every 25 years for the remainder of the term). Designed to protect the freeholder against the effects of inflation, an escalating ground rent is arguably not particularly unreasonable. However, you should be aware that it will make any future lease extension more expensive.
There has been a fair amount of commentary over the last few months of escalating ground rents that have seen huge annual figures payable at the end of the term of the lease making some leasehold properties unsellable and un-mortgageable.
How much is the service charge and what does it include?
Usually around £1000 – £3000 per annum, this is the fee that enables landlords to recover the reasonable costs they incur in providing services to the building. This will usually cover general repairs/maintenance, as well as the insurance for the building. If services are provided, it should also cover things such as central heating, lifts, lighting and cleaning of the building’s shared areas.
It may also cover contributions towards a reserve (or ‘sinking’) fund to help to cover unexpected expenses that may arise. However, it may not, so check if this is charged separately.
As leasehold properties can be either flats or houses, it is worth noting that leasehold houses have less protection than flats in some important arears such as service charges; where houses pay an estate service charge.
Once you own the property any future service charges are yours to pay so it is important to have information before exchange of contracts of any future planned works and their costs along with specific confirmation that any works that have already been carried out have been paid for by the seller or that there is sufficient money in a contingency fund to cover the payment when they are demanded. This avoids your facing an unexpected bill after you buy the property. To discover if there are arrears of service charge is also important as referred to in the next section.
Does the seller owe money?
Any arrears owed by a seller will become your responsibility following completion. Whilst you may be able to sue the sellers for breach of contract if arrears are not paid, success is never guaranteed. The level of arrears are often not worth the risk of incurring litigation costs if you are unsuccessful.
Your solicitor should ensure that full details of any arrears are known before completion. If there are arrears, they should request evidence that these have been settled before exchange of contracts or demand an undertaking from the seller’s solicitors that they will be settled prior to completion. Nevertheless, it is a good idea to ask the question early on so that you can gauge whether or not this is going to be a barrier to you.
What are the fees for supplying a Management Information Pack?
The management information pack is provided by the freeholder (or the managing agents on their behalf) and contains important information about the property and the freeholder.
As it is the seller who pays the fee for supplying this information, this may not be your immediate concern. However, as these packs often cost up to £500 + VAT, it is a good idea to take a note of it so that you are not taken by surprise when you come to sell the property. The fee for supplying this information is currently unregulated, so it is safe to expect this fee to have risen by the time you come to sell.
This is not legal advice; it is intended to provide information of general interest about current legal issues.