If you’re looking at buying a flat in Belgravia, Mayfair or Knightsbridge, it is most likely a leasehold property. Many of the stunning terraces that characterise the area belong to the Grosvenor Estate and other landowners and are sold on a leasehold basis.
For anyone new to the London housing market, it’s worth finding out about freehold vs leasehold and all the things you need to consider when purchasing a flat or apartment.
The different forms of home ownership
There are two main types of home ownership in England; freehold and leasehold. Most flats and apartments are sold on a leasehold basis, but some houses are too. Whether a home is on the market as freehold or leasehold is one of the first questions you should ask when viewing the property.
What is freehold?
When you buy freehold, you are buying the property and the ground on which it is built. There should be no additional services charges or ground rent to pay on the property, which you will own in perpetuity. Unless it is a listed building or in a conservation area, you are free to make alterations, subject to planning laws.
What is leasehold?
Unlike with freehold homes, buying a leasehold gives the buyer the right to occupy their new abode for the amount of time stated in the lease.
Leaseholders have ownership of the interior of the property but not the ground on which it is built, the exterior walls or the roof.
Key features of leasehold
What is in the lease?
The lease will outline the leaseholder’s obligations, which may include keeping the flat in good order or behaving in a neighbourly fashion. It may also include clauses such as no pets, without the prior consent of the landlord.
As part of a leaseholder’s contractual rights, they would normally expect the building’s owner – also known as the landlord or freeholder – to manage, maintain and repair the building’s structure, common areas such as staircases, hallways and lifts and exterior grounds.
A key thing you need to check before viewing a property is the lease length – as they are not all the same.
A property’s first lease will be lengthy, far exceeding the number of years its first owner would live there – most commonly, around 125 years, although some are for as long as nearly 1000 years. As properties get older, and pass between owners, the length of time on a lease is reduced.
The freeholder owns the property again at the end of the lease period. A flat with around 79 years or less left on the lease may prove problematic when it comes to getting a mortgage. Buy with cash and it may be impossible to find another buyer.
What is ground rent?
Many owners of leasehold properties will need to pay ground rent to the landlord on an annual or half-yearly basis. This has traditionally been a nominal amount, known as a ‘peppercorn rent’ and sometimes for less than £1 a year – or no more than £300.
What are service charges?
In order to keep the communal areas of the development intact and presentable it is not uncommon for leaseholders to be asked to pay regular monthly or quarterly service charges. These can include a one-off payment to a sinking fund in the event of a particularly expensive bill, such as a roof repair or structural reinforcement.
Extending the lease on a leasehold property
Under the 1993 Leasehold Reform, Housing & Urban Development Act, flat owners are entitled to a 90-year extension to their lease at a fair market price, as long as they have bought the house more than 24 months ago.
If you are buying a place with a short lease, you can make it a condition of sale that the vendors begin this process (referred to as ‘leasehold enfranchisement’).
If you wish to formally ask your freeholder to extend the lease, it is advisable to get legal representation and to have the property valued with a ‘realistic cost’ – known as the premium.
The amount of the premium will depend on factors including the value of the property, the number of years on the lease and any ground rent you need to pay. You can get a rough idea of the cost by using the lease extension calculator on the Lease Advice website.
You will need to serve a Section 42 notice, with the amount you wish to pay to extend the lease. You will also need to state clearly when you expect a response (this can’t be earlier than 60 days after the original notice was served.
You may be asked to pay a deposit of £250, or 10% of the premium set out in the Section 42 notice, if it’s more. The landlord also has a right to access your property to conduct their own valuation. You will be liable to pay your own and your landlord’s legal and valuation fees.
The landlord must respond to you with a counter notice, stating whether they accept your terms. You will then enter into negotiations until terms are agreed by you both.
Failure by your landlord to respond within the set timescale means you can then go ahead and ask the county court for your preferred lease extension. This must be done within the following 182 days (half year).
It isn’t necessary to take this legal route if you can negotiate terms with your landlord informally. However, it is still advisable to have independent legal advice before agreeing to anything – to make sure you are receiving the most favourable terms possible.
Issues or disputes between freeholders and leaseholders
Disputes between the landlord and leaseholder are taken to the First Tier Tribunal. This is an independent adjudication panel which can make an order. However, the order can be appealed and taken to an Upper Tribunal. Following the second tribunal decision, an enforcement order can then be made.
Buying a property with a short lease
If an owner doesn’t take steps to extend the lease, there may be only a short period of time left – this could be the reason why a flat in an area such as Belgravia may appear to be surprisingly good value for its location. Purchasing a property with a short lease may be an affordable way of buying in a prime location, as long as you accept the risks involved and are prepared to negotiate a lease extension, once you’ve owned the property for two years.
However, you can also make leasehold enfranchisement a part of your negotiation when buying a property with a short lease. If the current owner has started the enfranchisement process before a sale is completed, you are allowed to inherit and continue that legal action.
New proposals for leasehold enfranchisement
Last year the Law Commission put forward a series of recommendations to alter the enfranchisement process and make it easier and less expensive for leaseholders to own their own property.
One of these is for both house and flat leaseholders to be able to extend their lease to a new standard 990 years without having to pay any ground rent. This was made into law by the government in January last year.
The Law Commission also want homeowners to have more control over management of their own apartment blocks and housing estates.
Other recommendations include providing an online calculator to make it easier for tenants to work out the premium payable on extending their lease or purchasing freehold rights.
Under the proposed new rules valuers would also have to use prescribed rates when working out premiums. They would also be asked to remove the ‘marriage value’ ie the added cost for when both leasehold and freehold is held by just one individual. Another recommendation is to allow the tenant more say over development of the property, doing away with the addition of ‘development value’ as an addition to the premium. These recommendations are not yet law but are expected to be introduced in coming months and years.
Buying the freehold on a leasehold property
There is another way to get a longer lease though. Provided you can get at least half of those who own a lease in the apartment block to agree, it may be possible to buy a share of the freehold. This is a process referred to as collective enfranchisement.
What is the right to manage?
The right to manage was introduced through the Commonhold and Leasehold Reform Act 2002. It gives leaseholders the statutory right to take over the management of their property from the landlord by setting up a special company – a right to manage company.
You can learn more about leasehold enfranchisement on the lease advice website.
Best Gapp is a Belgravia estate agent, chartered surveyor and property valuer that specialises in leasehold enfranchisement. For further information about leasehold property for sale in Belgravia and other parts of prime central London, contact Best Gapp’s property specialists today.