I have been told that the property I am intending to buy is ‘Leasehold’ but what does that mean?
There are different categories of property ownership but the 2 most common are ‘Freehold’ and ‘Leasehold’.
Freehold means the owner owns the land on which the house stands ‘free’ from anyone else. Leasehold means you do not own the land on which the building stands, nor do you own any garden. The majority of houses are sold Freehold although some may be Leasehold, therefore, the land will be owned by someone else. The person who owns the land is called the ‘Freeholder’. The Freeholder will give permission for you to occupy the house or flat for a certain period and subject to certain conditions. The document that contains all the details is known as a ‘Lease’ and you become the ‘Leaseholder’. The word “Landlord” can also be used to describe the Freeholder and the word “Tenant” to describe the Leaseholder.
Are all Leases the same?
No. If you are buying a flat within an apartment block all the other flats in the block should be the same. If you are buying a house on an Estate, you may find there are other houses that have Leases on similar terms but if you see a Lease for one flat and later buy another Leasehold flat in another apartment block, it is very unlikely to have the same terms.
How long is a Lease and does it matter?
Again, every Lease is different. When the property is sold for the first time the ‘term’ or length of time you have the right to live in the flat or house is set. Common terms are 99 years, 125 years or 999 years but anything is possible.
If you are buying from a previous owner you have the remainder of the term. So, if a Lease started in 1970 with a 125 years term, it finishes in 2095. If you buy the property in 2010 you will have 85 years left.
The amount you have left does matter. Mortgages will only be available where there is a large number of years left on the term. What is a ‘large number’ depends on the Lender but it will usually need to be a minimum of 50 years and commonly 60 or 70. The problem for you is that if you buy a Leasehold property that has, for example, 75 years left; then live there for 10 years before selling it, you will now have 65 years left. The person who wants to buy it from you will feel the Lease is too short. This will affect the saleability of the property and its price.
If the Lease term is too short what can I do?
If you are buying a house we would recommend requiring the Seller to buy the ‘Freehold’ so you can now buy a Freehold not a Leasehold property.
For flats, the position is very different. An owner may be able to apply for an extension to the Lease. A Leaseholder that has owned a flat for 2 years or more usually has a right in law to ask the Freeholder to extend the Lease to 90 years plus the balance of the existing length of the Lease. Ground Rent (explained below) may be reduced to what is known as a “peppercorn” so in effect you no longer pay Ground Rent. Even if you have not owned the flat for 2 years or more, the Freeholder may agree to extend the Lease. Either way, you would have to pay a sum of money, known as a “Premium” to the Freeholder for the extended Lease.
It is important to be aware that the longer you leave it to extend the Lease, the higher the Premium to pay to the Landlord becomes. However, it is then worth investigating whether all the flat owners are interested in trying to collectively buy the land from the Freeholder. This would usually be done by setting up a Management Company to buy the Freehold and then the Company could grant new longer Leases to flat owners. The position is very complicated.
We can advise you on this, though the work is not covered by our standard conveyancing work. We would recommend you speak to us before you exchange contracts.
You have mentioned ‘Conditions’ – what are they?
Again, nothing is standard but the Lease document sets out all the rights you have and what you can and cannot do. ‘Rights’ will include giving you use of communal halls and stairways; access to other parts of the building and may also give you parking rights or use of gardens etc. The other clauses are known as ‘restrictions or covenants’. We will give you a copy of the Lease and will explain any clauses you do not fully understand. We also check to make sure the Lease includes all the rights you need. Sometimes we will find that something is wrong with a Lease. In such cases we may need to get the Lease corrected and this can take time. In the worst case we might have to recommend you do not buy the property but this is rare.
Are there any payments I have to make?
Almost certainly, yes. The Lease usually has a ‘Ground Rent’. This is your payment to the Freeholder for him/her allowing you to use the property and usually it is paid per year. Again, nothing is standard. Very old Leases might have a figure of 5p; new Leases are more likely to be £200.00 or sometimes it is ‘a peppercorn’ which means you pay nothing.
The other payment you may have is a ‘Service Charge’. We will obtain details of what has been paid in the last 3 years and ask the Freeholder whether changes are likely in the future. The Service Charge often covers the insurance of the building, repairs to the roof/main structure, painting the outside and communal areas, maintenance of any lift, keeping the gardens in good order and many other items.
Service Charges can be quite high. Leaseholders have been given some legal protection. If there is a particularly large item of work to be undertaken such as new roof, or exterior rendering, the Freeholder might need to obtain 3 estimates and then notify the Leaseholders inviting their comments. Usually, the only way Leaseholders can have a real say in what is done and the cost is by taking over the Management themselves. This is known as the ‘Right to Manage’. There would need to be at least half of the owners who wish to do this and is a complicated procedure. Again, our specialist solicitor can provide advice.
Buying any Leasehold property is complicated and we will guide you through the process.
If you have any questions or concerns, please contact us for advice on 01905 721600 or via email email@example.com