When buying a property, we know that this will be an exciting time for you whether it is your first property or you are expanding your portfolio. You may notice when enquiring to buy a property that it is listed as either freehold or leasehold, and it is important that you understand the differences between the two types of property ownership.
Here, we answer your questions about purchasing a leasehold property, the associated costs and the responsibilities that come with leasehold property ownership.
Should you have any further questions relating to this type of purchase you can contact our Residential Property team local to you.
A leasehold property means that you own the physical building for a fixed period of time, for example a house or flat, but the land on which the property is built is leased from a freeholder. The lease is a legal contract between the leaseholder (the person buying the property) and the freeholder (the owner of the land) granting you the right to live in the property for a fixed period which can range from 99 years to up to 999 years.
This differs to a freehold property when you own the property and the land it is built on.
Owning a leasehold property comes with various fee obligations made payable to the person or organisation managing the building, typically your landlord or management company. These fees would include but are not limited to:
Ground rent is the amount of rent that you as the leaseholder pays to the freeholder for the use of the land on which the property is built. It is usually a fixed amount that is payable annually or bi-annually and your lease will set out the terms of the ground rent, including the amount payable and when.
Some leasehold property leases may have clauses that allow for ground rent to increase over time, known as an escalating rate. We can check the lease and refer you to any information included relating to ground rent increases, how to make calculations for the future and ensure that they are reasonable.
A service charge is a contribution for the maintenance and repair of the common parts of the building, such as the hallways, walls, and communal areas. The service charge may also cover the cost of services such as cleaning, gardening, and building insurance. Your lease will set out the terms of the service charge, including the amount payable and when, what services are covered and how the charge will be calculated, i.e. whether it is a fixed percentage or a “reasonable proportion” of the costs incurred.
As with the ground rent clauses, we can review any service charge inclusions to be able to present you with all the facts.
You may be required to pay administration fees for services such as obtaining consent for alterations to the property, issuing a new lease, or dealing with the sale or purchase of the property.
These fees tend to arise as and when these services are required, and the amount chargeable can vary, which is why we will review the lease for details of any administration fees.
A reserve fund, also known as a sinking fund, is a sum of money that is provided in advance and set aside to cover the costs of major repairs or renovations to the building. The reserve fund is typically used for expenses that are not covered by the regular service charges.
There is no legal requirement for leaseholders to have a reserve fund. However, most leases will include a provision for the collection of a reserve fund as part of the service charge, and this is not returned to you upon selling the property, so the terms of the lease should be reviewed closely before purchase. We can also discuss any future plans with the freeholder to allow you to budget accordingly and ascertain whether there is enough in the reserve fund to cover these.
The length of the lease is an important factor to consider when buying a leasehold property. As the lease gets shorter, the value of the property may decrease, making it harder to sell and for any potential future buyer to obtain a mortgage.
The length of the lease will determine the amount of ground rent and service charge that you are required to pay. As mentioned previously, these fees are typically set out in the lease agreement, and they can increase over time, especially as the lease gets shorter. As a result, the cost of owning a leasehold property can become expensive as the lease gets closer to expiry.
Some mortgage lenders require a minimum length on the lease, usually between 75 – 80 years and some may require even longer, which is why you should enquire as to the length of the lease in the initial stages to secure your mortgage offer.
When purchasing a leasehold property, you must ensure that you comply with the terms of the lease involving areas such as pets, sub-letting, running a business or making particular alterations. Each freeholder will have different specifications so reading the small print is always recommended before committing to a property, as a freeholder could bring enforcement action against you should you not comply.
It is possible to extend the lease on a leasehold property, however there are certain requirements to enable you to do so.
To extend a lease, you must have owned the property for at least two years. For leasehold houses you have the right to extend by 50 years and for flats by 90 years. There is a specific process to follow and there are several different routes open to you, depending on your own personal circumstances, which we can discuss with you in more detail to determine which may be the most appropriate route for you.
If you purchase a property with a share of freehold, you will not only own the leasehold interest but also part of the freehold title. This can provide more control over the property’s management and decision-making.
If you have owned a leasehold house for at least two years, you can purchase the freehold interest from the current freeholder. The process is more complex for leasehold flats, requiring a collective group of leaseholders to purchase the freehold in a process known as collective enfranchisement.
While buying a leasehold property has a similar process to buying freehold, there are certain responsibilities and costs that you should be aware of before proceeding, and we hope we have explained these in more detail here. Should you have further questions about purchasing a leasehold property, lease extensions or collective enfranchisement, you can call us today at your local office, use the Contact Form or email moc.n1702098741ellub1702098741rekra1702098741p@ofn1702098741i1702098741.