General Advice on Leasehold Property
Thu 15 Aug 2019
SOME GENERAL ADVICE ABOUT LEASEHOLD PROPERTIES
What does leasehold mean?
You own the flat or house (but not the land it sits on) for a given number of years (e.g. 99, 125, 999) under an agreement called a lease which gives you the right to occupy and use the flat and share the use of other areas of the building or estate. Ownership of the whole is held by the original freeholder, a company or individual who has purchased it from the original freeholder, or alternatively all (or a majority) of the individual leaseholders may also have a share of the freehold, so that it is held jointly by them all.
This is the written agreement that gives you the right to live in and use the property. The agreement will set down the rights and obligations of you (the lessee) and the freeholder/landlord (the lessor) and include a plan showing what part of the overall property is included in the lease.
Importance of lease length
The same lease is passed on every time the flat is sold, so the length of the lease keeps reducing. It is possible to increase the length of the lease, which can be quite important as mortgage companies are less likely to lend on a lease that has less than 80 years remaining. The owner of a leasehold property has an automatic right to apply to extend the length of the lease after owning the property for 2 years (known as the formal route). The sum to be paid to the freeholder is agreed by negotiation, and results in 90 years added to the years left on the lease, at a peppercorn (effectively nil) ground rent. A leaseholder can try to negotiate a lease extension at any time purely by negotiation with the freeholder (known as the informal route) but that is not obligatory and terms may not be as favourable. There are specialist surveyors who can provide advice and guidance on this.
This is your payment, which is usually in advance, of your share of all the costs of maintaining and insuring the main building and common areas, not your own part of it. The amounts will vary depending on the services provided, and according to each year’s budget, but will typically include insurance, electricity for common parts, window cleaning, gardening, fire risk assessment, etc. Part of the service charge may be allocated to a reserve or sinking fund – essentially a rainy day fund to cover expensive, but infrequent works (e.g. external decoration, replacement of the lift, or roof repairs). This enables the cost of major works to be spread over a number of years and will hopefully avoid the necessity of having to pay an extraordinary cost for an expensive item which cannot be afforded from the reserve fund.
The service charge is usually paid annually or every six months.
A ground rent is created when a freehold piece of land is sold on a long lease or leases.
The lease will specify how much rent you have to pay. The ground rent cost can vary from quite low (even a ‘peppercorn’ – basically nothing) to a higher fixed or rising ground rent, and is usually paid annually or every six months.
Ground Rent can be fixed or rising. If it is fixed it means that it remains the same throughout the term of the lease. Rising Ground Rents will increase during the course of the lease. The lease will specify when the Ground Rent increases and by how much.
Caution – with initial ground rents of over £250 and steeply rising or doubling ground rents it may be more difficult to obtain a mortgage. It is important to check this information, therefore, at an early stage.
A firm of agents may be appointed by the freeholder to arrange services, repairs, maintenance, improvement, or insurance or to deal with any other aspect of the management. Where all the individual leaseholders also have a share of the freehold, the managing agent will organise an AGM so that all important matters such as programme of repairs, and setting the service charge can be agreed and implemented.
Legislation granted a right for leaseholders to acquire the freeholder’s management functions by transfer to a company set up by them – the Right To Manage (RTM) company. The right was introduced, to empower leaseholders, who generally hold the majority of value in the property, to take responsibility for the management of their own block and in our experience usually proves to be very effective.
Further information here:- https://www.gov.uk/leasehold-property
This information is provided in good faith for general information and guidance only. It is important to always seek legal advice when considering the purchase of any property, especially leasehold property.
Copyright Paul Watts Estate Agents