Q&A with Rachael Donnelly, associate solicitor in the property litigation team at Blacks Solicitors LLP, on the key things to look out for when buying a leasehold property.
What is a leasehold property?
When you buy a leasehold interest in a residential property, you are also entering into a contractual relationship with your landlord which is governed by the terms of a lease. Your landlord might be the person who owns the freehold interest in the property or it might be a person who has themselves leased the property from the freeholder.
The lease will usually require you as the leaseholder (also known as the tenant) to pay ground rent and, more often than not, a service charge. It will also restrict the way in which you can occupy and deal with the property.
Most flats are sold on a leasehold basis but it can apply to houses as well. It has become more common for developers to sell the leasehold interest in new-build properties, retaining the ability to charge a ground rent.
How long is the lease?
A landlord only grants a lease for a limited period of time. As the term expires, the value of the interest will decrease. Although residential long leases will often have been granted for a term in excess of 99 years, it is important to be aware of when the term will expire. If you are purchasing the leasehold interest from the outgoing tenant (and not from your landlord), then part of the term will already have expired.
Can the term be extended?
It may be possible to extend the remaining term of your lease by 90 years using a procedure governed by the Leasehold Reform, Housing and Urban Development Act 1993. In order to be able to undertake this procedure, you need to have owned the leasehold interest for at least two years. You will be required to pay a premium for the lease extension and will need to instruct a valuer to determine what price should be payable. The less time the lease has left to run, the higher the premium is likely to be.
My ground rent seems reasonable, so why should I be worried about this?
It has become much more common for landlords (often, but not exclusively, developers) to charge much higher ground rents. Sometimes the charges are not so obvious - the lease may refer to a current ground rent of say £45 but it gives the landlord the ability to increase the ground rent at certain points throughout the term of the lease. The recent “ground rent scandal” has shone a light on this problem.
Even if you can afford to pay a higher ground rent, it will make your property much harder to sell in future.
Is the service charge separate to ground rent?
Yes, a service charge is an additional fee you may be liable to pay if you have bought a leasehold property. Many leases (particularly of flats) will contain a number of provisions requiring payment to the landlord of a service charge. Generally, the landlord may be responsible for repairing and maintaining the common parts (for example staircases, car parks etc) and the exterior of the building.
It is important to bear in mind that if the cost of works which may be recovered via the service charge could be substantial. In September, the Guardian reported on the case of a woman who has seen the annual service charge on her London flat increase from about £500 to more than £7,600.
I’ve bought my leasehold property, so I can do what I want with it, right?
Unfortunately it’s not that simple. The way in which you deal with the property will be governed and restricted by the terms of your lease. You may not be able to occupy or alter the property as you want and you may also be required to pay annual rent and service charge.
If you breach any of the terms of the lease (also known as leasehold covenants), then the landlord may be entitled to take legal action against you.
Is it possible to turn my property into a buy to let?
It is common for a landlord to restrict your ability to sub-let the property, even on a short-term holiday let (via Air BnB or similar). One tenant did this and the landlord brought proceedings against her for breach of covenant. The Upper Tribunal agreed with the landlord. Be warned.
What will the landlord do if I breach a covenant?
This will depend on what the nature of the breach is. If it is a failure to pay a sum due, then the landlord may issue a claim against you. If they obtain judgment and you don’t pay, then you could have a CCJ against your record. In all cases involving a breach of covenant, the landlord may ultimately be able to forfeit the lease, meaning you could lose your asset. For that reason, the ability of a landlord to forfeit a residential lease is heavily regulated. Nonetheless, it is an option available to them.
Can I buy my freedom?
Potentially. There are ways in which you can buy the freehold interest from the landlord.
If the property is a house, then the procedure would be governed by the Leasehold Reform Act 1967 and a premium would be payable. Valuation evidence would also be needed. If there are covenants in the lease that restrict you from doing what you want to with the property, then in some cases, these covenants may still be binding after the purchase.
If the property is a flat, then you might be able to join together with the other leaseholders in your building to purchase the freehold of the building.