Following on from the success of our previous post we thought we’d take a closer look at leasehold properties and the tings to be aware of.
SO where to begin?
A lease is basically an extremely long-term letting agreement, with the rent already paid up front as the purchase price. So the ‘ground rent’ is simply a token gesture, a distant relative of the rent that you’d pay when renting a flat. Usually it’s a small amount, such as £100 to £200 per year, perhaps paid in two lots of six-monthly instalments to the freeholder.
The vast majority of flats are managed by either the freeholder-landlord or a management company responsible for repairs and maintenance. However, managing agents are often employed to physically carry out the day-to-day works at the property.
This, of course, isn’t done out of the goodness of their hearts. The owners of the individual flats, the leaseholders, have to pay a service charge (or maintenance charge), which unlike ground rents can involve serious money, often totalling several thousand pounds per year.
The service charge should cover maintenance of the external fabric of the building as well as the upkeep of communal areas, such as cleaning entrance lobbies, stairs and corridors, plus taking care of any lifts.
One of the ironies of buying flats is that modern blocks requiring relatively little maintenance often have far higher charges than rambling old mansion blocks in need of extensive and frequent attention. Costs incurred by the freeholder-landlord for arranging buildings insurance are sometimes included or may be invoiced separately.
Things to watch out for
Purchasers of flats need their wits about them. There are a number of key points to watch out for when buying leasehold property. These are discussed in more detail later, but briefly they include:
- The lease term
If the remaining lease term is currently much less than about 70 years it could mean that when you come to sell in future, it could be too short for your buyer’s mortgage lender, who may refuse to lend. This in turn can reduce the value of the flat, because of the potential cost of getting the lease extended.
It’s essential for solicitors to obtain written confirmation that all the charges due, such as ground rent and service charges, have been fully paid up to date.
Is there any backlog of outstanding works, especially big-ticket items like windows and roofs? Check whether the freeholder has accumulated some reserve ‘sinking fund’ money to cover any big future repair bills. Otherwise you could get hit with some nasty bills in future.
Does the lease contain any petty restrictions that could unreasonably cramp your lifestyle – are pets banned, for instance?
- Who’s who?
Simple question: who exactly is your freeholder? Some may have disappeared without trace and are impossible to contact.
Perhaps there’s a managing agent? If so, are they doing their job properly?
If it ultimately turns out to be impossible to make contact with your freeholder, then they can be designated an ‘absentee landlord’. If a leaseholder can prove this, then it should be possible to take legal action to acquire the ‘right to manage’ your property.
How to extend your lease
Once your remaining lease term has withered to 70 years or less, mortgage lenders can get a bit sniffy because they know that properties with shorter leases can start to reduce more swiftly in value. So it makes sense to apply to extend your lease. This will be a lot easier where the Freehold is already owned by all the individual leaseholders.
The first step is to find out how much extending your lease is likely to cost, which unfortunately isn’t always as easy as it sounds. To start the ball rolling, a suitably experienced local surveyor should be appointed to come up with a professional opinion of value.
However, valuing a leasehold extension is a complex business. It depends on a number of variables, including the market value of the flat, the length of time left on the lease, and the value of the landlord’s interest (ie how much ground rent income the property generates each year, and how much the flat is likely to be worth many years in the future at the end of the lease).
You can then either serve the freeholder with a formal notice of your intention to extend your lease, or open informal talks with them, based on the figure stated in your independent professional valuation.
The problem with this system is that, at the end of the day, the cost of an extension is still a matter for negotiation, and some freeholders can be very good at exploiting their position by demanding awesome sums of money. If you and the freeholder cannot agree a price, you need to take the case to the Leasehold Valuation Tribunal.
- Valuation: for a property worth less than £300,000, a typical valuation will cost around £500, rising to around £700 for a £500,000 property.
- Serving notice: from £275.
- Legal fees: from £500 to £1,000.
- Application to the Leasehold Valuation Tribunal: £400.
This is where you begin to appreciate the extra work that solicitors have to struggle with when purchasing leasehold properties. Whereas a conveyancing job on an average freehold house could be done by Freddy the hamster without the need for too much extra tuition, there are a lot of questions to ask with flats, not least how many there are.
Of course, in some buildings there may just be two flats, perhaps where the original upstairs and downstairs of a house have been converted. At the other extreme, architects have succeeded in cramming hundreds of flats into monumental tower block megastructures, to create complex cities in the sky.
Legally, however, there’s not a lot of difference. In both cases the individual flats form part of a larger building, so it’s necessary to decide who exactly is going to be responsible for maintenance, and how the cost of repairs should be shared.
After all, if the roof were to one day need replacing, it would be a trifle unfair for the person dwelling on the top floor to be lumbered with the bill.
And what if the bloke in the ground floor flat decides to remove a structural wall, perhaps forgetting that all the flats above rely on it for support? Clearly there needs to be some sort of restriction on owners chopping out bits of the structure and making major alterations willy-nilly.
Such problems are solved by giving each owner a lease, a legal contract that clarifies who is responsible for what. The lease should list all the important obligations, such as repairing the exterior and maintaining common parts, gardens and garages.
It should also confirm shared rights of support, thereby limiting what owners can do. At least, it should. Some older leases were badly drafted and may not be at all clear, or they completely omit important information.
Others may contain punitive charges imposed by greedy freeholders intent on behaving like feudal landlords taxing the urban poor. So it’s basically up to your solicitor to be sharp-eyed enough to spot such concerns before you sign on the dotted line.
What’s in a lease?
The lease governs your relationship with the freeholder and with other leasehold flat owners in the block. The lease is a long contract between the leaseholder and freeholder, setting out all the rights and duties of each party, such as who is responsible for maintaining and insuring the building, and paying the ground rent and service charges.
Although leases follow a standard format some older ones may not be clear and can contain weird stipulations or hidden nasties. So your solicitor will need to carefully check the lease for any clauses that are unreasonable or ‘onerous’.
The basic structure of all leases is similar. They start with the names of the parties, the length or ‘term’ of the lease and the amount of ground rent.
Then there are the various obligations for the flat owner (the ‘leaseholder’ or ‘tenant’), and for the freeholder (‘landlord’). For example, ‘the landlord is to maintain the property’s exterior and common parts, and the tenant is to pay a proportion of the cost of maintenance & repairs as a service charge’.
Assessing the service charge
When buying a flat, one of the key questions is how big the service charge is. Needless to say, these can sometimes be very high indeed, notably where there’s a serious backlog of repair works.
But service charges may be very high for other reasons, perhaps because the building is being badly managed and the freeholder is busy siphoning off funds. So it’s important to ask for copies of the service charge accounts over a few years to see how consistently the building’s maintenance regime has been applied.
Although leaseholders are protected by law from excessive charges for shoddy work, it’s best to avoid potential worries in the first place. A badly-managed block should normally be evident from the visible lack of maintenance, often combined with high charges.
Legally, a service charge is only payable if it’s ‘reasonable’, so it’s important to ask the seller if there are any disputes with the landlord about the level of charges. You don’t want to step into an ongoing legal battle.
Also, check the lease to see when the service charge is payable, normally annually, six-monthly or quarterly.
In reality, accurate figures aren’t always available at the time you need them. At completion, very often the accounts showing the true sums for the year that you’re buying will not yet have been prepared.
Although freeholder-landlords are now under a legal obligation to issue leaseholders with annual itemised service charge statements, in some cases even the previous year’s costs may not yet have been finalised.
If accurate figures are not available at completion then ‘assessments’ and ‘apportionments’ are made instead – in other words, only educated guesses.
The problem is, as soon as you become the owner of a leasehold flat you will suddenly be liable for all expenses – even those that accrued before you bought.
As well as charging for works scheduled for the current year, most leases allow for a ‘sinking fund’. This is a ‘war chest’ of cash, built up over time so that leaseholders aren’t stung with a massive bill when the roof needs replacing or expensive works to windows or lifts are needed for the entire block.
So it’s a good sign if there’s already a sizeable amount of cash in the kitty.
Ask the seller whether there are any scheduled major works, typically ones that would require payment from you of £300 or more for a single job. Legally, all such works must be notified to the leaseholders before being carried out.
The frequency of larger maintenance works is normally specified in the lease, so, for example, external decorations are often stated as needing to be done every five years. This information will help you budget accordingly.
Leases often state that you are not permitted to sublet a flat, or to assign (pass on) the lease to someone else without the landlord’s consent – which normally means that you can sublet it because legally the landlord’s consent ‘must not be unreasonably withheld’ (although they may want to charge a small fee to confirm this).
But in other cases there may be an absolute ban. Any such restrictions against subletting could be crucial if for example you’re a buy-to-let investor. So if you’re planning to rent out your flat, this must be checked.
Breaches of covenant
Another important thing to check whilst delving into the (possibly murky) history of your lease, is whether there have been any breaches. If a previous leaseholder has done any serious stuff that’s not permitted, violating the conditions of the lease, there could be trouble ahead.
For example, any unauthorised structural alterations, like internal walls removed and chimney breasts removed, would have required consent from the freeholder (and Building Control).
A more common breach is where ground rent or service charges haven’t been fully paid. This is crucial to check because, strictly speaking, any breach of covenant could allow the landlord to terminate your lease and repossess the property (with a court order). Mortgage lenders are aware of this risk and will lean heavily on the leaseholders to encourage them to cough up.
So before buying, you need to get the freeholder-landlord to confirm that there have been no breaches of covenant, and especially that all charges have been paid.