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Thinking of buying a Leasehold flat? Here are some important points to consider which you may not have anticipated.
What is Leasehold
With Leasehold property you only own the property for a fixed period of time (the ‘Term’); this can be 999 years or maybe only 99 years.You will have a legal agreement with the landlord (sometimes known as the ‘Freeholder’) called a lease. If you buy a leasehold property you will be known as the ‘Leaseholder’, ‘Lessee’ or ‘Tenant’. This means you own the property for the Term but not the land it stands on, which is owned by the Freeholder.
Ground rent is charged to the Leasehold owner by the Freehold owner for the land the property sits on. Often the ground rent may be a nominal amount, possibly even a ‘peppercorn’ (no charge). Other ground rents in newer flats may be a couple of hundred pounds. Your Conveyancer will advise you of the ground rent. Beware of problematic leasehold properties with doubling or unfair ground rent reviews which could devalue the property and/or make it unacceptable for mortgage lenders.
Service charge is a contribution towards your share of the costs of maintaining the Leasehold property. This can include decorating and maintaining the common areas, landscaping, window cleaning etc.
Service charges vary but can often be up to £1,000 per annum. Be aware, service charges are not fixed and can rise significantly if major works are required. A court recently decided that the Leaseholders of a block in Battersea have to pay to replace flammable cladding on the block following the Grenfell Tower Disaster leaving them with potential bills of up to £40,000.
Term of the Lease
When you buy a leasehold property you inherit the lease that was originally created for whatever term is left (unless of course you buy a brand new property which has a brand new lease) and the property returns to the Landlord when the lease term comes to an end.It is important to consider the unexpired term of the lease (the amount of years left to run) as some lenders require a minimum of 85 years to be remaining at the end of the mortgage term. You should therefore consider whether the unexpired term may cause you issues when you come to sell. It is possible to request that the Lease be extended, however this can be costly.
The Lease will contain a number of restrictions on how you can and cannot use the property. These must be complied with so it’s important that you are comfortable with the implications. For example, it may prevent you from keeping any pets or from making structural alterations. There may also be positive obligations such as to decorate every so many years. The Landlord may be able to take legal action against you if you do not comply with the restrictions and obligations.
Often people don’t anticipate the additional costs associated with Leasehold properties when buying or selling. On a sale, it is common for the Freeholder and/or Management Company to request a fee for a ‘Leasehold Pack’. These fees vary significantly but can be anywhere from £200 to as much as £800 for each ‘pack’ required – if you have both a Landlord and Management Company then often two packs are required.
Equally, on a purchase, buyers often have to stump up Notice fees for letting the Landlord/Management Company know you have bought the property. There may also be fees associated with additional Deeds and transferring of shares and certificates. Again, these fees vary and also depend on the terms of the Lease but should be taken into account as they can be similar to the cost of a ‘pack’.
All of the above mean there is more for you and your Conveyancer to consider and review. The Leasehold Pack will include historic management accounts, service charge and ground rent accounts, general information about the property and many other documents. Further enquiries will often need to be made and your Conveyancer will also need to calculate/approve ground rent and service charge apportionment's on completion. Most importantly, they will have to review and report to you on the terms of the Lease and ensure the Lease is satisfactory to your lender.