Leasehold Flats - What Are the Pitfalls?
Before discussing the pros and cons of freehold versus leasehold flats, it is good to start with a quick recap as to what each term means.
Most flats in the UK are leasehold and this means that you own the property, but the land it stands on is owned by the freeholder who in reality is your landlord. You have the right to live in the property that you have bought whilst the lease is valid. It is similar to renting a property long term.
Buying a freehold property means that you own both the property and the land it stands on.
In the UK, there are four million leasehold homes and 1.2 million are houses, the other 3.8 million are flats.
There are certainly some points that you need to know if you are considering buying a leasehold flat.
Buying a Leasehold Flat
The first thing to do is to check how long there is left to run on the lease – the usual length of a lease is 99-125 years, though some are for up to 999 years. Under 70 years is considered to be a short lease. It is possible to get a mortgage on a property with a 70 year lease, but if there is 65 years or less on the lease, it will be almost impossible to get a mortgage.
If the lease is for 80 years or less this can negatively affect the value of the property. If you buy the flat when it needs the lease to be extended, you will not be able to do this until you have owned it for two years. It is far better to get the person selling the flat to apply and pay for the lease extension as they will have the right to ask for the extension. Lease extensions are not cheap – on average about £10,000 per 20 years and this figure increases the shorter the lease time left.
Your solicitor can check out the exact number of years left on the lease and will also ensure that the building has been properly leased – i.e. 2/3 of the building must be leasehold. It is also important that your solicitor checks with the flat seller and landlord that all maintenance, service and insurance charges have been paid up. All the annual maintenance, service and insurance charges need to be checked by the solicitor so that you know exactly what you are liable for. Good solicitors check what the projected costs are for years to come because if they increase in cost sharply, they will have a negative impact on the interest shown by future buyers.
The leasehold of the flat usually refers to everything within the four walls – including the floors, walls and ceiling, but not including the exterior walls or anything outside the front door!
The lease is an important document and you should read a copy of it carefully. There are two sections; one saying what the landlord is contracted to do and the other is for the leaseholder and this will clearly state what the flat can and cannot be used for, any restrictions on owning pets, subletting etc. As the lease is usually in legal jargon, get your solicitor to provide you with a copy in everyday English so that you understand your rights and responsibilities and know exactly what you are signing!
The purchase of a leasehold property usually takes longer than a freehold property as your solicitor will need to verify the period of the lease and all expenses you as the leaseholder will incur.
Extra Costs That Are Incurred with a Leasehold Property
There are a number of bills you will be responsible for if you buy a leasehold flat and these are:
- An annual ground rent fee which is paid to the 'landlord'(which can be an individual or company).
- An annual maintenance charge which is paid to the landlord and in return he/she should ensure that all common areas including hallways, landings, lifts, lights and the front pathway and garden are kept in good condition and working order.
- An annual service charge which the landlord should use to get the common areas regularly cleaned and tidied.
- You will be requested to pay a portion of the building insurance which will be administered by the landlord – you can ask to see the policy. You will be responsible for taking out a separate policy for your own flat.
- Some landlords ask for regular non-refundable contributions to a 'reserve fund' which will be used when major building work is carried out on the property.
If you feel that the charges by your landlord are steep, you can the 'Leasehold Value Tribunal' (LVT) to challenge any unfair charges.
Buying the Freehold or at Least a Share of It!
The magic number with leaseholds seems to be '80 years' and if you have this number left on your lease it is well worth trying to buy the freehold. This can be done through a legal process called 'enfranchisement'. You may be able to buy a portion from the landlord, or alternatively all the flat owners can club together to try and buy the freehold and the cost will be the fair market value of the land. Each flat owner then becomes a member of the management team.
The advantages of doing this are to safeguard your future in the flat and also to lower the maintenance and insurance bills as these are often over-priced and by shopping around you will be able to get the same cover/ services for less cost.
Another huge bonus is that by owning the freehold, you will be adding 1-2% + to the market value of your flat.
Selling a Leasehold Flat
When you first decide that you would like to sell your leasehold flat, the first thing to do is to check that you have 80 years plus to run on the lease. If not, it is best to trigger an application for a lease extension or the enfranchisement process if you have been the registered owner for a minimum of two years.
If you are not sure which is best for you, it is well worth seeking the advice of an independent leasehold value as both will impact the value of your flat. The important point to remember is that both take time so it is well worth starting work sooner rather than later - clever leaseholders keep an eye on the number of years that they have left on the lease and take action whether or not they are planning to sell.
A Very Important Point to Bear in Mind
The most important point to bear in mind is that even if you, as the leaseholder, have bought the flat and paid off the mortgage, when the lease period comes to an end, the property will become a freehold property and will become the property of the landlord (the freeholder) – and you will have no legal claim to the property.
The key to success in leasing a flat is not to leave extending your lease or enfranchising it to the last moment. If you do, you will probably end up paying over the odds just because time is not on your side.