May Legal Update
Six Things To Think About When Buying Leasehold Property
Tim Bishop, Senior Partner at Bonallack and Bishop Solicitors in Salisbury provides the May Legal Update. He gives us a guide to Six things to think about when buying a leasehold property.
Buying any leasehold property – whether it’s a house or flat – is different from owning a freehold property.
That’s because with leasehold ownership, you don’t out property outright – you just pay for the right to live there and use the property for a set number of years. But that shouldn’t necessarily bother you. It doesn’t seem to bother around 4.6 million other people who happily own leasehold houses or flats in the UK.
But buying leasehold property, you do need to be aware of a few things.
But before we deal with that – one very simple piece of advice. Make sure you know what’s in your lease. Because if you don’t, you could find yourself in difficulties. And yes, some leases appear complicated, but that’s what your solicitor is there to do. To explain anything you don’t understand in simple terms.
But when buying any leasehold property, here are the 6 things you really do need to bear in mind:
How long is left on your lease?
This is absolutely critical, and you should never consider buying a property until you know how long the existing lease term is. There is an enormous difference between say a flat with 125 years left and one with just 5 left before it runs out.
Short leases (particularly 70 years or below), are hard to mortgage and difficult to sell.
That’s because at the end of the lease, your property will revert to the freeholder unless you have extended your lease (virtual leaseholders have a legal right to extend their lease – or you can negotiate informally with your order).
So when buying a property, it really important to know exactly how many years you have got left on your lease.
Understand Your Right Buy your Freehold or extend your lease
Many residential leaseholders have no idea of their right to a lease extension. And it’s hardly surprising when far too many solicitors don’t explain the right to lease extension when you buy leasehold property and given that many estate agents don’t understand this either.
In short, leaseholders have a legal right to extend their lease for extra 90 years, with the ground rent reduced to £0. You can also negotiate an informal or voluntary lease extension with your freeholder – but this route does have certain risks.
But the right to extend your lease depends on you having owned your leasehold flat for at least 2 years.
However, it is worth knowing that there is a way to avoid waiting 2 years before applying for your lease extension. In short, when buying a flat, if the seller has themselves owned the property for at least 2 years, they can put the formal lease extension application in themselves, at no cost to them, and transfer the right to you on completion. This means you can crack on with your lease extension immediately your purchase goes through.
And, when considering whether or not to extend your lease, you need to know that (particularly in a rising housing market), the cost of doing so is likely to rise for 2 reasons. Firstly, in a rising housing market, your property will be gradually worth more – and the more your property is worth, the more it will cost to extend your lease. And add in the fact that day by day, your lease getting shorter – because the shorter your leases, the more expensive it is to extend.
Finally, it’s worth knowing that the day your lease drops below 80 years, the price of a formal lease extension goes up. So, if at all possible, you should extend your lease before it drops below 80 years.
As a residential leaseholder you also have the right to buy the freehold of your house or block. However, if it’s a block, you need to do so with at least 50% of flat owners – which can become quite tricky to organise and maintain involvement with really large blocks. What’s more, there is similar legislation allowing you to take over the right to manage your block. So if your block is badly run or you think that your service charges are too high – buying your freehold or exercising your right to manage could be a smart option.
And we strongly advise that you don’t even try to extend your lease, buy your freehold or exercise your right to manage yourself. It’s a complex process – and few solicitors understand it or handle it regularly. In contrast we have a specialist leasehold team of 5 people doing nothing but this area of work.
Make sure you understand the level of Service Charges
If you own leasehold property, you’re likely to have to pay an annual service charge to your freeholder. This is to cover costs of maintenance and the upkeep of the building and communal areas including, for example, any gardens, stairs, corridors and the roof.
Service charges vary hugely – from a few hundred pounds a year to many thousands.
And you have the legal right to ask freeholder to explain exactly how those service charge were spent. You are entitled to see relevant receipts, and it is actually a criminal offence for any freeholder to refuse to provide these to you.
Ask About any Reserve Funds
A reserve or sinking fund is there to cover future maintenance or repair costs to your building.
Not every leasehold property will have a reserve fund – but you need to make sure you know whether there is one and what your liabilities are. In particular, it is really important to make sure you understand from your solicitor whether there are any if “major works” planned or other likely future demands for service charges or reserve funds.
One final point. In the event of there being a current reserve fund surplus, you may find that the sellers ask you to repay those unused reserve fund monies on completion of the purchase. And that effectively adds to the price you’re paying to buy your new leasehold property.
Check the level of ground rent
Despite much publicity, ground rent continues to be payable on most existing leasehold properties. It’s only new leases from 30 June 2022 to which the “ground rent ban” actually applies.
Now sometimes, ground rent is a small sum., but it’s usually at least £150 – often far more. In particular, you need to be aware of what your lease says about future increases in ground rent. In the past, many leases allowed for doubling of the ground rent every 10 years – and that can lead to substantial ground rent liability in future.
Read your lease to see what you can or cannot do.
Every lease is different – but many contain restrictions on what you can or cannot do with your property. Some, for example, limit changes you can make to your flat without the approval of your freeholder (who may also be entitled to charge you for granting you permission to carry out certain alterations). Others may restrict your use of your flat for commercial purposes or for letting out – which may mean you can’t use that new flat or house as a buy to let. And some leases still contain clauses limiting occupation of your property to just one family. This can stop you flat or house sharing for example.
To summarise, whilst it is true that owning leasehold property may involve some additional costs and restrictions on your ability to use of your flat our house, the fact is that many millions of people happily own their own leasehold flat. It is still usually a sound investment, but before you buy your leasehold house or flat, do make sure you understand exactly what you’re taking on and that your solicitor explains everything to you in clear language.
For further information about anything you have read in the May Legal Update, contact the team at Bonallack and Bishop Solicitors. They are a fast growing law firm based in Wiltshire and Hampshire with offices in Salisbury, Andover, Fordingbridge and Amesbury. You may also find these pages on their website useful:
Please note. While we take care in choosing local property partners to recommend to our clients, we cannot be held responsible for the service they provide.
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