Top tips on leasehold properties
1) Buying a leasehold property means you will own the property, but not the land it stands on or the rest of the building in which it is located. This will be owned by the landlord. As the leaseholder you will be required by the lease to pay ground rent, service charges, management fees and buildings insurance to the landlord or their appointed managing agent, on top of any mortgage repayments, utility bills etc. Such charges may vary from year to year. Always factor these costs into your financial plans.
2) It is important to be clear who the landlord is and whether they have a managing agent acting for them. In some cases there may also be a Management Company involved in running the site as whole and you may need to make payments for different charges to different people. Where there is a Management Company they may also have their own managing agents and they may make their own charges on you as the tenant, which will increase the overall costs that you have to pay while owning the property.
3) Before viewing any leasehold property always check the length of the lease remaining with the estate agent or the seller. Be aware; sometimes a leasehold property may seem cheap, but that is because the length of the lease is short. Most mortgage lenders won’t lend on short leases which limits who the property can be sold to. Also, if the seller can successfully sell a short lease they can avoid the additional costs involved in extending the length of the lease. Therefore, if you find that the property you are buying has a short lease you should request that the seller obtains an extension of the length of the lease at their expense and before you buy it. It is usually the responsibility of the seller to extend the lease with the landlord as the cost of doing so can be tens of thousands of pounds. You may have a lender who is willing to lend on a short lease, however you must bear in mind that when you sell your buyers may not be so lucky or you will be required to extend the term of the lease at your expense before you can sell. It is important to bear in mind that if the number of years left on a lease falls below 80 it is more expensive to extend it as the landlord is then allowed to charge the tenant something called “marriage value” which can increase the cost of any extension dramatically.
4) When considering whether a lease extension is required it is important to bear in mind that there are two ways of obtaining this. Firstly, the landlord can grant an extension at any time voluntarily. Secondly, a tenant who has lived in the property for at least two years can force a landlord to grant a lease extension. This is called a “Section 42 Claim”. To start such a claim the current tenant, the seller, has to claim the right to extend the lease, then pass this on to the buyer to complete afterward they have purchased it (because otherwise the buyer won’t have the right until they have owned the property for two years). This can be very complicated and costly and so ordinarily, it is far better to get the length of the lease extended by the seller at their expense and before you buy it.
5) In some instances it is possible to buy a share of the freehold of the property. This has two main advantages. Firstly, as you and your fellow freeholders own the freehold you are in effect your own landlord and can exercise greater control over the running of the building. Whilst this may mean more work for you, it can mean lower charges for things like the repair and insurance of the building and you may decide to suspend the payment of any ground rent on an informal basis. Secondly. It should be easier extend the length of the lease to whatever number of years you choose, such as 999 years.
6) If you are not able to buy a share of the freehold with the leasehold property it is possible for you and your fellow leaseholders to force the landlord to sell you the freehold at a later date. However, this can be costly and complicated as it requires at least 50% of the leaseholders within the building to want buy the freehold. For further details and advice visit the Leasehold Advisory Service website: www.lease-advice.org
7) For a rough guide to the cost of extending a lease, see the ‘Lease Extension Calculator’ available on the Leasehold Advisory Service website: www.lease-advice.org
8) Always check the description and plans of the property within the lease carefully against the physical layout. If there are any discrepancies you must alert your chosen lawyer as soon as possible. Any discrepancies can have serious consequences and can be expensive and time consuming to correct therefore it is vital to have any amendments made by the seller at their expense and before you buy it.