Buying Leasehold Property
There are four major ways in which leasehold ownership is different from freehold ownership:
you and your successors do not own the property for ever. You own it only for the length of time stated in the lease.
there will be a rent to pay to the landlord.
there will be more rules about what you can and cannot do with the property and in some cases it is possible to lose your property if you break them.
you may have to pay a service charge for the upkeep of facilities shared with other owners.
The length of the lease, what you have to pay and the rules that apply vary from property to property. They are set by the wording of the lease. This fact sheet covers properties let on a long lease at a low rent (often called a ground rent).
Are there advantages to leasehold property?
If you are buying a flat or maisonette (particularly if it is not on the ground floor) it needs to be leasehold. Leases of the flats contain detailed rules so that the whole building is kept in repair and individual owners cannot do things that might deprive other flats of structural support. If you were to have a freehold upper floor flat you would just own your part of the building and the air space it occupies (a situation called a flying freehold). You would not have the legal rights you need to secure structural support and shelter from the other parts of the building. This situation is normally not acceptable to mortgage lenders so it would be difficult or impossible to get a mortgage loan on such a property.
Leasehold title may also be an advantage for properties on a planned development with shared facilities like communal gardens, so that there can be more detailed management arrangements.
If you are buying a standalone house it is hard to see any advantage of leasehold except the possibly lower price compared with a similar freehold property.
How long left on the lease?
Leases are usually for 99 years but longer leases including leases for 999 years are not uncommon. The length of the lease starts to become of possible concern when there is less than 60 years of the lease left to run. Some mortgage lenders will not accept a lease which will have less than 30 years to run after the end of the mortgage. So to get a mortgage repayable over 20 to 30 years from such a lender you would need an unexpired lease of at least 50 to 60 years. You would also need to think about how easy it will be to sell the property when you want to move on as the remaining term of the lease gets shorter.
If the owner does nothing about it, when the lease ends the landlord can take over the property. People sometimes wrongly think that because the rent is called a ground rent the householder will still own the buildings and that it is only the site that reverts to the landlord. In fact the buildings are treated as having become part of the land so the leaseholder loses the entire property when the lease expires.
You will get the right to buy an extension of the of the lease or buy the freehold
This right applies only to residential property. As long as the leaseholder and the property meet the required conditions the leaseholder has the right to make the landlord renew the lease or sell the freehold. There are also rules which allow tenants of blocks of flats to make the landlord sell the freehold to a company collectively representing the tenants.
Rent issues and problems
The ground rent is usually only a few pounds a year. It will not be seen as a problem by a prospective buyer or mortgage lender unless the lease allows for it be increased. Even then there is no problem if the increases are fixed and not excessive, for example if the rent is £20 per year now and will increase to £40 per year in twenty years time. It could be a problem if the lease allows the rent to be increased and you do not know in advance how much the increase will be.
The seller must be able to produce a receipt for the ground rent paid up to date. This is important because the landlord can claim rent from a new owner that was not paid by the previous owner. Secondly the landlord will not accept payments as rent or issue a receipt for rent while the landlord believes that the householder is in breach of any of the covenants in the lease.
Breach of covenant problems
Leases tend to contain a lot of rules (covenants) that the householder has to comply with. In most cases they are reasonable rules designed to maintain the residential character of the development. The landlord has powerful means of enforcing these covenants. As well as being able to take court action the landlord usually has the right to forfeit (end) the lease. So householders could apparently be faced with the alarming prospect of losing their home because, for example, they failed to redecorate the property every so many years as required by the lease.
The law does allow the householder to escape from this predicament by putting right the breach of covenant if it is capable of being put right but a situation like this could involve considerable expense.
One of the more common difficulties of this type is unauthorised alteration of the property. The lease may have a clause saying that you are not allowed to carry out any alteration or addition to the property without submitting plans to the landlord and getting the landlords written approval. The property has been extended and it may well be that both planning permission and building regulation approval were granted by the local authority for the extension. But no one thought at the time to get the plans approved by the landlord as well. Going to the landlord and getting the extension approved retrospectively can be a costly exercise.
Service charge and repairs issues
A service charge is usually payable where the property is a flat in a block of flats. The charge will vary from one year to the next based on the actual cost of providing the services that are included. The lease will say what types of expenditure can be included in the service charge. This can vary from the basic requirements of heating lighting and cleaning shared stairs and passageways to more costly things like the maintenance of ornamental gardens or the provision of 24 hour security staff. You will want to know what the charge came out at over the last three years and how the amount is made up.
You will also want to know whether there has recently been any exceptional expenditure such as major repairs or whether it is likely that any such expenditure will be needed in the near future. Large items like replacing the roof of a block of flats can bump up the service charge to each flat owner by a considerable amount in a particular year. They are also a frequent cause of disputes with some owners who perhaps benefit less directly from the proposed expenditure challenging the need for it and the amount of it and possibly also with mounting difficulties over collection of service charge payments. It is worth looking closely at any ongoing issue of this kind before buying. Does the situation mean that you could be faced with unexpectedly high service charge bills? Is the situation compromising the ability of the landlord / managing agent to ensure that the building is properly maintained?
Notice of change of ownership
Most leases include a clause requiring a new owner to give notice of the change of ownership to the landlord. The landlords agent or solicitor will be entitled to charge a fee for receiving the notice. In many cases a notice is also required of any new mortgage on the property and a second fee would be payable for that.