An apartment in a prime London location sometimes comes on sale for what appears a very competitive price. Look closer and you might find the flat has only a few years remaining on its lease. While a short lease will affect the value of a property, you shouldn’t necessarily rule it out. The law gives leaseholders the right to negotiate terms for extending a lease, or even buy the freehold altogether. The important thing is to be well informed and take proper professional advice.
If you’re looking to buy a flat in Belgravia, Mayfair, Knightsbridge or Chelsea, the chances are it will be a leasehold property. So, whether you’ve set your heart on a purpose-built block, a period conversion or an apartment above an exclusive shopping street, read on for the essential guide to purchasing leasehold.
Leasehold or freehold what’s the difference?
A leasehold flat gives the purchaser the right to occupy a property for the amount of time specified in a legal agreement – the lease. This is different to the other main form of ownership, freehold, where the purchaser owns the property outright.
Leases tend to be for a long period; probably much longer than the number of years you’ll own the property. Most leases are for between 90 and 120 years, although they can be for a much shorter term or the maximum of 999 years. Ownership of the property will ultimately revert to the freeholder – also known as the landlord – once the lease expires.
As a leaseholder there may be certain conditions attached to ownership of your property, around making alterations, for example. In addition, you may be required to pay a fee, or ground rent, as a condition of the lease.
Ground rent has traditionally been a nominal amount, often of less than £1 a year, known as a ‘peppercorn rent’. More recently, particularly in new-build properties, higher ground rents, which increase over time, have started to be charged.
What if the lease is running out?
As the number of years left on a lease begins to diminish, the value of the property can be affected. When your lease has less than 90 years left, you should think about negotiating an extension. A lease with less than 80 years remaining will become more expensive to renew. When such a lease is extended the freeholder is entitled to half of the increase in the value of the property, as well as the fee for extending the lease. This is known as the ‘marriage fee’ – because it marries two costs together.
Extending the lease on your flat
The legal process for extending your lease is called leasehold enfranchisement.
A leaseholder, who has been living in the property for more than two years, can formally ask the freeholder to offer a lease extension. This is known as serving a Section 42 notice under the Leasehold Reform, Housing and Urban Development Act 1993.
You will need to appoint a solicitor and a valuation surveyor, who can recommend a realistic cost for extending your lease – 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.
It isn’t necessary to take this legal route – 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.
When you serve a Section 42 notice, you will need to propose a realistic premium for extending the lease. You will also need to specify when your landlord should respond to you with a counter notice – this must be no less than two months from the date you served the original notice.
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.
If your landlord doesn’t respond, or submits a response after the deadline, you can apply to the county court for a lease extension on the terms set out in your original notice. You must do this within six months of the original deadline.
If you can’t agree
Disputes between the landlord and leaseholder can be referred to an independent body known as the First Tier Tribunal. Orders made by the First Tier Tribunal can be appealed against in the Upper Tribunal if either party thinks there was a legal problem with original decision. Once the Upper Tribunal has given its ruling, it can be enforced by a county court order.
Buying a property with a short lease
Purchasing a property with a short lease may be an affordable way of buying in a prime location such as Belgravia or Mayfair, 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. Buyers of short-lease properties can therefore ask the vendor to begin the lease extension procedure as a condition of the property sale.
Buying the freehold on a leasehold property
An alternative to extending a lease is to get together with your fellow leaseholders and buy a share of the freehold. This is known as collective enfranchisement.
To qualify, a block of flats must be an independent building, or be a part of a structure that is capable of independent development.
At least two-thirds of the flats in the block must be held by qualifying tenants; that is tenants with a lease of more than 21 years, who own no more than two properties in the building.
You will need to get at least 50% of leaseholders in your block to agree to participate for the collective enfranchisement to go ahead.
Landlords who want to sell the freehold of a building containing flats usually have to offer the leaseholders the first chance to buy it. This is known as your ‘right of first refusal’.
The advantages of buying the freehold to your property are:
- Flats with a share of the freehold are usually more desirable than leasehold properties and tend to be worth more.
- As a freeholder, you can select managing agents, who are directly accountable to you, or decide to self-manage. Either way, it puts you in control of awarding contracts and arranging insurance so you can ensure best value.
On the other hand …
- If only the minimum 50% of owners in a block want to participate, the cost to each leaseholder will double and could become expensive.
- Managing a building is a complex task, as you’ll be responsible for complying with a wide range of laws and regulations – from asbestos to fire safety.
Find out 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.