You’ve found your dream home, and it’s a leasehold. So, what does that mean?
With a leasehold, you own the property until the lease expires. After that, ownership returns to the freeholder.
If the lease is long, making it easy to resell, leaseholds can be a good investment.
Here’s what you need to know when buying a leasehold.
Key takeaways
- With leasehold properties, you own the property for the duration of the lease, after which ownership returns to the freeholder.
- Always check the lease length before buying a leasehold. If it drops below 80 years, getting a mortgage can be difficult.
- It’s advisable to do a statutory lease extension with a solicitor rather than a non-statutory one.
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Be cautious of short leases
Before viewing a leasehold, check the lease length with the estate agent or seller. If it has less than 80 years left, consider the impact carefully. Properties with shorter leases can be harder to mortgage. A lease under 70 years can significantly affect the property’s value.
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Lease extensions can be costly
Extending a lease can cost several thousand pounds, depending on the property’s market value, lease length, and ground rent. For instance, extending a lease on a £200,000 flat with 79 years left could cost around £10,000 for a 90-year extension. The shorter the remaining lease, the higher the extension cost.
If a property you want to buy needs a lease extension, the seller can play a crucial role. The current owner can claim the right to extend the lease before selling the property to you. Otherwise, you’ll have to wait two years after purchase to extend it yourself. It’s best if the seller extends the lease before you buy, as the process can be complex and costly. Consult your solicitor for advice, as this can add time and complexity to the sale.
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There are two methods for extending a lease
The best route is always the statutory one.
The statutory route, known as a Section 42 Notice, is a legal request from the leaseholder to the freeholder. You’ll need a specialist solicitor to file the paperwork and possibly represent you at a tribunal. This route often ends up cheaper than the non-statutory route but involves legal fees. It adds 90 years to the remaining lease and reduces ground rent to zero. The downside is it can take longer and incur legal fees, but a freeholder cannot decline the request.
The non-statutory route is more informal. You approach the freeholder directly for an extension, and they respond with a fee you can agree to or decline. However, the freeholder can refuse the extension, or quote a higher fee than the statutory route. They might also increase ground rent or insert other terms. The extension length can vary widely. It’s quicker and doesn’t technically need a solicitor, but you should have a proposed extension checked by a solicitor.
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Be on your guard if a leasehold property seems cheap
If a leasehold home seems too cheap, it probably needs a lease extension. Factor this into your offer price. Do your homework on the market rate and always ask about the lease length before making an offer.
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Keep in mind the lease’s expiration
Even if the lease seems adequate upon purchase, remember it may require extension later. Plan ahead and initiate the extension process before the lease falls below 80 years.
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Scrutinize all lease terms
Some leases hide unwelcome surprises. You might encounter hefty fees for home alterations or restrictions on pet ownership or subletting. Ensure your conveyancing solicitor thoroughly examines the lease terms.
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Beware of escalating ground rents
Although ground rents are typically nominal, some can escalate significantly. If your ground rent doubles every few years, you could face substantial bills. Seek legal advice before purchasing, especially regarding future ground rent charges during lease extensions.
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Be cautious of maintenance fees
The responsibility for maintaining communal areas typically falls on the freeholder. While they dictate the necessary work and costs, it’s the leaseholder who foots the bill. Request information on past and future service charges to avoid unexpected high fees.
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Mind the insurance expenses
Leaseholders are usually required to contribute to the building’s insurance. Understand the anticipated costs to avoid surprises when arranging insurance coverage.
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Acknowledge the complexity of leasehold purchases
Buying a leasehold property can entail more complexities than purchasing a freehold. Solicitors often need extensive documentation from the freeholder or management company regarding the lease, including details on ground rent, service charges, insurance, and financial accounts. Expect potential delays due to this additional administrative process.
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Consider resale implications
A lengthy lease with minimal ground rent and reasonable service charges facilitates straightforward resale. However, escalating ground rents or a dwindling lease term below 80 years can complicate future sales. Be mindful of these factors to ensure smooth resale transactions.
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Consider the complexity of share of freehold
Opting for a “share of freehold” entails owning a portion of the freehold through a company, granting all flat owners a stake. With this setup, each freeholder contributes to the upkeep of communal areas and retains control over expenditure. For leasehold houses, purchasing the freehold outright is a viable option.
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Note limitations on permitted development
While homeowners can now extend their properties without planning permission under Permitted Development Rights, this privilege does not extend to flats and leaseholders. Leaseholders must seek approval from both the freeholder and the council for significant alterations. Though minor changes may receive consent, expect fees for requests and permissions, adding an extra layer of complexity.
What does leasehold property mean?
In the realm of property ownership, a leasehold arrangement denotes that you’re essentially leasing the property from the freeholder. In this setup, the freeholder retains ownership of both the land and the building structure itself. This lease typically spans a specific duration, often ranging from 99 to 999 years. Throughout this period, you hold the right to occupy and utilize the property in accordance with the terms outlined in the lease agreement.
Contrary to a leasehold setup, a freehold property grants you outright ownership of both the building and the land upon which it stands. This distinction is crucial in understanding the nature of property ownership in the UK. While the majority of properties across the country operate under the freehold model, it’s worth noting that a significant portion of flats are subject to leasehold arrangements. This prevalent use of leaseholds in the flat market underscores the importance of grasping the nuances of such property arrangements.
Navigating the intricacies of leasehold versus freehold ownership is paramount for prospective property buyers. Understanding the implications of each arrangement empowers individuals to make informed decisions when entering the property market. Whether opting for the permanence of freehold ownership or navigating the terms of a leasehold agreement, clarity regarding property rights lays the foundation for a secure and informed investment in the real estate landscape.
How much is the ground rent?
Before finalizing the purchase of a leasehold flat, it’s essential to ascertain the ground rent costs associated with the property. The lease agreement will delineate the specifics regarding ground rent, including the amount payable and the due date for payment.
Does the ground rent change?
The lease agreement typically stipulates the obligation to pay an annual ground rent, which is the amount paid by the leaseholder to the landlord. This sum can vary widely, ranging from a nominal fee of £10 to a substantial sum of £200 per year. It’s crucial to understand the terms regarding ground rent, including its amount, potential fluctuations, and any consequences associated with increases. Consulting with a solicitor or conveyancer can provide clarity on these matters and help anticipate any implications.
In many cases, the ground rent is subject to periodic reviews, often tied to the Retail Price Index (RPI) or another inflationary index. However, some leases outline fixed increases over time, irrespective of inflationary trends. Lenders may impose specific criteria regarding ground rent, preferring properties with indexed ground rent or similar structures. This preference aims to mitigate the risk of non-payment issues and ensure the property’s future marketability and ease of resale.
Understanding the intricacies of ground rent is essential for leaseholders, as it can significantly impact the overall cost of homeownership and the property’s financial viability in the long term. Being aware of the terms governing ground rent and their potential implications empowers buyers to make informed decisions and avoid potential pitfalls in their property investment journey.
How much are the service charges?
Leaseholders typically bear the responsibility for service charges, which represent a portion of the expenses associated with managing and maintaining the property. These charges enable the landlord to recoup the costs incurred in delivering essential services outlined in the lease agreement.
The lease agreement delineates the respective obligations concerning service charges, outlining the leaseholder’s responsibilities and the landlord’s duties in managing and upkeeping the property. Service charges commonly encompass various services, including general maintenance and repairs, buildings insurance, and additional amenities such as central heating, lifts, and communal area lighting and cleaning. Additionally, the charges may encompass management services provided by the landlord or a professional managing agent, along with contributions to a reserve fund for future maintenance expenses.
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