If like me, you dream of buying a property but live in pricey London or another expensive city, your budget probably only extends to purchasing a flat. That means the property you will end up buying is more than likely to be a leasehold property. I thought I would give you an overview of the legal points that may impact your finances should you buy a leasehold property as your home or an investment.
What does leasehold property mean?
To see what leasehold property means, let’s start by looking at the law of property ownership in the UK.
Under the Law of Property Act 1925, only two types of legal estate in land may exist. (other types of ownership – equitable – exist but I will not cover that here). LPA s.1(1) provides:
(1)The only estates in land which are capable of subsisting or of being conveyed or created at law are—
(a) An estate in fee simple absolute in possession;
(b) A term of years absolute.
Now that sounds complicated (it is) and what it boils down to is what are commonly known as (a) freehold property, and (b) leasehold property.
What on earth does this mean? Basically, it means “an estate in fee simple absolute in possession”, known as freehold property, allows a person to own an estate in land forever.
An estate for “a term of years absolute”, known as leasehold, means you own the right to occupy an estate of land for a limited time.
Essentially when buying a leasehold property, you are being allowed to occupy an ‘estate’ for a period of time. That means if you have a house which is leasehold, at the end of the time in the lease, the ‘estate’ will return to the landlord to do with as they please. So if you have a house, and the lease ends, it now belongs to the landlord and they are free to occupy, demolish or whatever they like.
It is very much a hangover from the days of feudalism when you would have a landlord. In the case of leasehold property, you have a landlord who owns the freehold to the estate on which your property stands.
OK so even though I’ve bought a property, I still have a landlord?
Yes. A landlord may be the freeholder, the managing agent, or a right to manage company. They will collect ground rent and service charges.
Bummer! What are Service charges?
Within the lease, there are likely to be provisions for the landlord to collect money from the leaseholders for such things that range from hot water, communal power, insurance etc. The money demanded to cover these expenses is known as the service charge. The lease will specify to calculate it so it is important to check you are being correctly charged. There are strict rules that require the landlord to maintain records and accounts. It can be a criminal offence for the landlord not to provide these on demand.
Some of the items covered by service charge may require a S20 notice which is explained below.
Under Landlord and Tenant Act 1985 s20 (Section 20) (as amended by S151 of the Commonhold and Leasehold Reform Act 2002), a landlord may demand for leaseholders to contribute to larger expenditures amounting to more than £250 per leaseholder.
Section 20 also covers long term works that may include:
- agreements affecting the building generally (e.g. lifts, entry-phone systems, waste management or maintenance contracts);
- cleaning and gardening;
- utilities; and
- management agency agreements.
For further detail click here. Leaseholds are not a simple subject I’m only attempting to give you an outline of what is required. Get a Solicitor.
If there are any disagreements, the landlord must show that the expenditure is reasonable for the landlord to have incurred. If you disagree with the charges, you can take the landlord to a Tribunal for them to determine if the charges are reasonable.
There are a whole bunch of legal cases which define what this means.
What about Ground Rent?
Many leases require payment of ground rent. This is you paying the landlord for occupying their land! The lease details the rent, but many modern leases require only a peppercorn of rent, which is basically nothing.
Length of the lease
Normally leases will specify the length of time in whole years that they are valid though. The critical number to notice is 80 years. Once a lease has 80 unexpired years left on it you will find it difficult to obtain a mortgage for the property which will mean you will find it difficult to sell. One reason is that with a shorter lease because it becomes more expensive to renew the lease so this impacts the desirability of the property.
Renewing the lease
To renew a lease, you must have owned the property for two full years. If you are buying a property with say 81 years left on it, you can ask the seller to begin the renewal process before the sale goes through.
People commonly refer to this as extending the lease; however, what is happening is you are negotiating a new lease with the landlord which will in effect replace the lease you have. The renewal process is commonly known as a “Section 42 extension” as it refers to Leasehold Reform, Housing and Urban Development Act 1993 s42 which allows an additional 90 years on top of the remaining lease and a reduction of the ground rent to a peppercorn.
The price of the lease renewal determined by Sch 13 of the statute and is based on the value of the property. I recommend you obtain professional advice regarding calculating this from a Solicitor or Surveyor.
If the lease has less than 80 years left, then an extra charge will apply known as ‘Marriage Value’.
OK, you’ve lost me… what the heck is Marriage Value?
Marriage value intends to account for the additional market value of the longer lease. The profit from the extension may only come from the landlord renewing the lease, so the Act requires that profit be shared equally between the landlord and the leaseholder. Unfortunately, this results in the leaseholder paying more to the landlord. That is why it is more expensive to renew and why people don’t want to buy properties with short leases.
Any other pitfalls to be aware of?
Yes lots. Sometimes landlords abuse the system and charge you too much. Maybe the management company or agent is completely inept and doesn’t carry out any their responsibilities. And of course, the building may need a new roof shortly after you bought the flat and you get a bill for £20,000.
The old landlord and tenant game has been around for centuries and guess what? Landlords have vast resources, professional advisors, and lots of experience. You don’t stand a chance.
If you are thinking of buying that new flat in the Docklands, or perhaps a new build house in England somewhere, the chances are it is a leasehold property. I’m not saying don’t buy the property as it may meet your needs, be cheaper than renting or give you more space, but don’t think for a minute you won’t face these issues.
I have personal experience of people who have bought new flats and two years after buying the landlord has doubled the service charge. I have also been aware of housing developments where the local council will not adopt the roads which means the residents must pay for their maintenance and upkeep often at vastly inflated prices.
Essentially, having led you briefly through the law of landlord and tenant for leasehold property, you should now be more aware of what you are getting into when buying a ‘leasehold’ property. I would personally not buy into a block or a group of flats of more than say, 5 in number, to be on the safe side. Try and buy a freehold property, where at least you are in control of your expenditure.