All you need to know about buying a leasehold
The cost of buying a freehold property in the current market is so expensive that it’s beyond the reach of most first time buyers. Most normally have to consider buying a leasehold property.
What is a lease?
The lease is a long-term rental agreement created by the freeholder and the cost of the lease is fixed at the time that it was created. The purchaser of the lease has to right to sell it on at any point during the agreed term.
How is buying a Leasehold Property different to buying a Freehold Property?
When you purchase a leasehold property, it means that you don’t own the land or the whole property, you simply have the right to live in the part of the property you have purchased for the amount of years that your lease allows.
When you purchase a freehold property, you are also purchasing the land that the property is on and also the property itself.
Houses are usually freehold properties while flats will usually be leasehold properties. In a block of flats, each individual flat would have its own lease term. Within the lease it will specify who has the ownership, responsibilities and the cost of maintenance work within the communal areas.
Having a leasehold property is similar to renting a property long term
Buying and renting leasehold flats are very similar concepts, both of the leases include:
- Length of the lease (rentals are shorter but a leasehold can go up to 999 years)
- Restrictions of what you are able to do to the property
- You have obligations to the freeholder (landlord)
- Leasehold property owners have to pay ground rent, similarly in rented accommodation you have to pay fees
This article will inform you of the key information that you will need to know when purchasing a leasehold property.
Short Lease Term
Once a lease has less than 80 years it is classed as a short lease. The problem will arise when you go to sell the property as most mortgage lenders insist on a lease term that has 70 years or more remaining.
However, this shouldn’t put off a purchaser as they can usually be extended as long as certain criteria are met. Meaning that the main problem with having a short lease term is that the leaseholder will have to pay a premium to the freeholder to extend the lease term.
Ground Rent and Service Charges
Ground rent is regular payments made by a holder of a leasehold property to the freeholder which is specified within their lease. The ground rent charges are created when a freehold piece of land is sold on a long lease or leases.
Service charges cover the costs of maintaining the communal areas, cleaning and electrical charges that are paid to either a managing agent, the council or the freeholder.
Service charges are sometimes paid in advance and it can also include the costs of works to be carried out, administration costs, accountant fees and also the costs of any full-time maintenance staff.
Your managing agent decides on the tradesmen that they use for the work to the property instead of the tenants who are paying the bill.
Managing Information / Leasehold Information Pack
If you are selling a leasehold property you must provide the buyer with the following information:
- Service charges
- Ground Rent
- Accounts for the management company for the last 3 years
- Any planned major works
- Overdue service charges or ground rent
- Other information they would need to know about the leasehold
It is important that you request the management pack as early on with the transaction as possible as it can take a number of weeks for it to finally come through. Private freeholder and councils are well known for being extremely slow to respond.
The cost of buying the leasehold information pack varies from around £100 – £300 based on who will be providing the pack. Unfortunately, the seller has no choice but to pay the fees for the pack as it is a requirement of the purchaser’s solicitor.
Leasehold Buyers Checklist
- Check to see how many years are lease. If there are 85 years or less, ensure a lease extension has been agreed before you buy the property.
- How much is the service charge and when does it need to be paid?
- Are there plans for any major works?
- Ensure your solicitor requests the leasehold information pack as soon as possible
- Agree a retention for any future liability to major works, service charges or ground rent
- Make sure you know exactly what’s being included e.g. if parking spaces are included and if you are the only one able to have it
- Ensure that your freeholder is absent. If they are not, then this can cause serious problems and may require you to maintain the communal areas of the property yourself, organise your own buildings insurance and it may require you to take more formal routes to extend your lease
Leasehold Conveyancing Costs
Always ensure that you have checked that the work relating to your leasehold transfer has been included within your conveyancing solicitor’s price. Whenever possible obtain a fixed fix quote – this is a good rule of thumb for conveyancing in general.
By Marcus Simpson
Digital Marketing Manager