Whether you’re after a flat in a landmark white stucco terrace, a new-build or a Victorian conversion, if you’re looking in Belgravia, Mayfair or the surrounding areas, it’s likely you’ll be viewing a fair few leasehold properties. Read on for the key questions to ask before you put in an offer to purchase a leasehold property.
What is a leasehold property?
The vast majority of flats and apartments in England and Wales are leasehold, as are some houses.
Buying leasehold means you are purchasing the property, not the land it stands on. It gives you the right to occupy the property for the period specified in the lease. This is different to the other main form of ownership, freehold, where the purchaser owns the property outright.
There is no reason why a property’s leasehold tenure should affect your purchase decision. However, there are three main things you need to ask about a leasehold property, before you decide it’s your future dream home.
1. What is the lease length?
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 years and 120 years, although they can be for a much shorter term – or as many as 999 years. Ownership of the property will ultimately revert to the freeholder once the lease expires.
As the lease gets shorter, the leasehold property reduces in value long before the agreement is due to expire. Once a lease has less than 80 years remaining, it becomes more expensive to renew.
In addition, anyone buying a flat with a lease of less than 80 years remaining is likely to struggle to obtain a loan on the property. Most mortgage lenders will be unwilling to consider a property with a short lease.
Cash buyers can sometimes find a property in a highly desirable neighbourhood at a bargain price, because of a short lease. But remember that extending the lease at this stage will be expensive and the property may be difficult to sell on.
The legal process for extending your lease is called leasehold enfranchisement. Once you have lived in the property for more than two years, you 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.
If you are buying a property with a short lease you can make leasehold enfranchisement part of your negotiations with the vendor. As long as the current owner starts the enfranchisement before the sale is complete, you can inherit and continue the process.
2. How much is the 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.
More recently, new-build properties, have come with higher ground rents, which increase over time. In some instances, charges of thousands of pounds a year have been made and clauses written into the leases allowing them to increase every 10 years.
While the government is looking into this issue, it’s worth being clear about the terms and the ground rent you’ll be paying, from the outset.
3. How much are the service charges and what are they for?
The landlord or managing agent for a block will usually impose a service charge to cover the costs of maintaining the fabric of the building and the shared areas. The charge may also include buildings insurance. Fees will vary depending on the size of the development and the value of the flat, so it’s important to know how much you are likely to be paying each year.
Some service charges include contributions to a reserve or sinking fund that is used to cover large one-off bills should major renovations be required.
Best Gapp is a Belgravia estate agent, chartered surveyor and property valuer that specialises in leasehold enfranchisement. To find out more about buying leasehold, and our range of properties, please contact us.