1. What is a leasehold?
Leasehold means that you have a lease from the freeholder (sometimes called the landlord) to use the property for a number of years. The lease sets down the legal rights and responsibilities of both parties i.e.: the freeholder/landlord and the leaseholder/tenant.
The landlord will normally be responsible for maintaining the common parts of the building, such as the entrance hall and staircase, as well as the exterior walls and roof.
Leaseholders will generally have to obtain permission from the landlord before carrying out any structural alterations, but do check the lease carefully, as consent may also be required for non-structural alterations. There will be other restrictions within the lease, such as not owning pets or subletting. There is no substitute for reading through your lease carefully to ensure you are familiar with your obligations.
2. How long is left on the lease?
When buying a leasehold, you are buying the right to possession of the property for the remainder of the lease term.
The term of the lease can affect the value and saleability of a property. You may be able to extend the term of the lease, but the cost of a lease extension increases dramatically once the term drops below 80 years.
3. What is ‘demised’ by the lease?
What a leaseholder owns is often defined in the lease as the “Demised Premises”. The leasehold ownership of a flat usually relates to everything within the four walls of the flat, including floorboards and plaster to walls and ceiling, but does not usually include the external or structural walls.
You should check carefully what is defined in the lease as part of the property and what is excluded from the property. Does the property include the windows, windows frames, roof space, roof, or foundations?
4. How much is the ground rent?
Your lease may require you to pay an annual ground rent to the freeholder. Ground rents are currently a ‘hot topic’ due to the problems they can cause when selling your property and the changes that are being introduced for new leases from this summer.
It is essential that you make ground rent payments as and when they are demanded. If you fail to do so, then your landlord may take legal action against you and may have the right to forfeit your lease.
You should also be aware that, if annual ground rent exceeds £250 (or £1000 in London), your lease may become an assured tenancy under the Housing Act 1988 if you are occupying the property as your main home. The effect of this is that a landlord could seek possession of your property in some circumstances (e.g., non-payment of ground rent within 40 days) and the lease could be brought to an end. In order to avoid this, you should always ensure that ground rent is paid on time, whether demanded or not. You should also be aware that, where ground rent does exceed these limits, it might limit your ability to sell or mortgage the property in the future.
5. Is there a ground rent review clause and how often is the rent reviewed?
The amount of ground rent payable and the frequency and method for increasing ground rents can all affect the value of a property and the premium payable to extend the length of the lease.
You should be aware that any rent increases which are excessive or unreasonable will affect the value of the property, or the ability to sell or mortgage the property in the future. For example, many mortgage companies will not lend if the ground rent is reviewed more frequently then every 25 years and when reviewed the rent doubles.
6. How much is the service charge?
Service charges are the contribution by the leaseholders towards the maintenance of the main structure and common parts of the building. Service charges vary massively depending on the communal areas, type of building and shared facilities. The service charge can also vary from year to year. Ask for a recent statement of account showing you the various service charges that have been charged in recent years.
7. Is there a reserve/sinking fund?
Part of the service charge may be paid into a reserve or sinking fund. These funds build up over time to cover the cost of any large expenditure. Without a reserve or sinking funds, a leaseholder could face a bill for thousands of pounds for the cost of any major works. Once paid into a reserve fund, you will not get that money back when you sell the property.
8. Are there are major works expected?
As part of the conveyancing process, your solicitor should check whether any major works have been carried out or if the landlord plans to carry are planned in the foreseeable future.
When major works are planned, if the cost of major works will exceed the sum of £250 for any one leaseholder, then the freeholder is required to consult with leaseholders by serving on them a Section 20 notice.
If there is a reserve or sinking fund, this can be used to pay some or all of the cost. If there is no reserve or sinking fund the cost of the works will have to be paid by the leaseholders and this may impact on the value of the property depending on the cost of the proposed works.
The key to purchasing a leasehold property is to make sure you know exactly what you are purchasing, what your obligations are and what the likely costs are now and in the future.
At Clifton Ingram our solicitors can advise you on all aspects of buying a leasehold property. We are a proactive and down-to-earth team of highly experienced solicitors, bringing a high quality and professional service to your local area. We regularly advise clients in Wokingham, Reading and Farnham and across all of Berkshire, Surrey and Hampshire.