It is necessary to be cautious and careful when buying a leasehold property. There are many risks involved and you can lose a lot of money and have a lot of problems if you don’t go about things the right way.
The key thing is to avoid the big and common mistakes made by buyers of leasehold property.
Where the legal title to a property is leasehold your rights and responsibilities are set out in a lease.
When people say you are “buying a lease”, what they mean is that you’re buying a leasehold property which is governed by a lease; you are buying both the property and the lease to which it is subject.
With a leasehold title you and your successors are entitled to occupy, use and enjoy the property for the length of the lease – which is typically 99, 125 or 250 years long.
Almost all flats are leasehold but you can also have leasehold houses.
With a freehold title, you and your successors can occupy, use and enjoy the property in perpetuity – forever.
A 999 year lease is often referred to a “virtual freehold”.
So what are some of the main mistakes to avoid when buying a leasehold property?
1. Leases close to or below 80 years
A lease may start off at 125 years for instance but, over time, its length will decline. It is possible to extend a lease when it runs down but the owner of the lease, or the lessor, will normally require payment of a “premium” for the privilege.
You have a statutory right to a lease extension if the lessor is not willing to agree one.
However, you should avoid buying a lease below 80 years or within a few years of being below 80 years. That is because it is appreciably more expensive to extend a lease once it dips below 80 years – because of the way the premium is calculated in that situation.
2. Expensive or uncertain lease extension
It is a bad idea to buy a lease which you wish to extend if you are not sure it will be (a) extended and (b) extended for the premium you are willing or can afford to pay.
You don’t want a situation where the lessor can be difficult or tries to squeeze you on the premium.
Best practice is to insist that the seller obtains a lease extension before completing the sale to you.
3. Exorbitant ground rents
As the leaseholder, your lease will normally require you to pay an annual ground rent to the lessor. Usually that is a modest sum, typically not more than £250 per annum.
However, you can come across much higher ground rents, which may put off buyers when you come to sell.
Further, the method by which a ground rent is increased may also be a problem.
If the lease provides for the ground rent to be doubled at periodic intervals, that could lead to the ground rent reaching exorbitant levels after a number of years – making the lease very unattractive to potential buyers and therefore reducing the value of the property or even making it unsaleable.
It is sensible to ask your conveyancer whether the ground rent provisions are fair and reasonable and will not lead to you or future owners paying exorbitant ground rents at a later date.
4. Excessive service charges
It is unwise to purchase a lease without seeing the service charge accounts and records for the 3 years prior to your purchase.
You want to be confident that the service charges made by the lessor or managing agent, for managing your leasehold property and any common areas, are fair and reasonable.
You should also insist on knowing what major, unusual or expensive works are planned in the foreseeable future.
It is very important to know your likely financial obligations or outlay under the lease.
If you fail to make payments lawfully due, or breach other major obligations or covenants in the lease, you could face “forfeiture proceedings” – which could lead to termination of your lease and your eviction from the property.
5. Building insurance
It is a bad mistake to buy a leasehold property without knowing the building insurance arrangements.
Before buying you should ensure that you see a copy of the policy and know the percentage or amount of premium you will pay.
Normally building insurance will be carried out by the lessor or managing agent with the leaseholders being responsible for the premium. There is usually one policy covering all the leaseholders who normally can and should ask for proof of insurance each year.
In some cases the leaseholders will be responsible for building insurance and they must show the lessor/managing agent proof of insurance where required by the lease.
6. Selling or renting
You should not buy a lease unless you know and are happy with the terms for assigning or subletting (selling or renting) the leasehold property.
Usually the terms will be standard, fair and reasonable. However, some leases contain onerous provisions – such as requiring the lessor’s permission and payment of substantial fees or charges before permission to sell or rent is given.
Such provisions could make a property less marketable or even unsaleable. They could also depress the price on a sale.
If you intend to rent out the property, for instance on a buy-to-let basis, you will not want a situation where you need to get the lessor’s permission before you can rent or take on an Airbnb type occupant.
It is not advisable to buy a lease which contains onerous terms which may adversely affect the disposal, marketability or price of the property.
7. Making additions or alterations
You will need to think twice about a lease where the provisions relating to additions or alterations to the building are overly restrictive or expensive.
Even if you do not intend to make additions or alterations, a potential buyer may wish to do so and may walk away if those provisions are not to their satisfaction.
With a fair and well-drawn lease the procedure for a leaseholder to get permission to add to or alter the property is clearly set out in the lease, with any fees or charges expressly stated and subject to an overriding provision that they should be fair and reasonable, or words to that effect.
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8. Leaseholder rights and obligations
The most important rights and obligations have been covered earlier in this blog, but there are likely to be many more.
You should be very clear as to all your rights and obligations as a leaseholder, since default on your part can have legal implications.
When you buy, your conveyancer will normally set out the main rights and obligations in a document typically called a “report on title”.
However, you should read the lease yourself and carefully note the rights and obligations – especially in relation to matters which are of particular interest to you.
Importantly, you will want to know your rights in relation to any outside space such as a garden, patio, balcony or roof terrace. Find out whether any outside space belongs to you by virtue of your lease or whether you simply have a right to use it.
If there is a cellar, basement, roof or roof space, find out your rights and obligations in relation to it.
If there are shared facilities such as path, track or driveway, find out the position in respect of maintenance and repairs.
9. Lease regulations
As well as obligations, your lease may contain regulations or rules as to how you can use your property.
They may relate to things such as the keeping of pets, carrying out business at the property and the control of sound emanating from the property.
You should check whether any regulation restricts or prevents anything you plan to do at the property.
Buying a leasehold property is more complex and carries a higher level of risk than buying a freehold property.
When buying a lease, you should carry out as much due diligence as you can. Do not make any assumptions as to what you can or cannot do at or in relation to the property.
If you have any questions or queries, be sure to put them to your conveyancer before you signing a legally binding contract to buy the property.
Have you ever bought a leasehold property and experienced problems or issues? Please leave your comments or observations below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com