It's well-known that leasehold properties come with additional restrictions and burdens that don’t apply to freehold houses but, as a landlord and investor, there are some additional things you need to be aware of and consider before making a leasehold purchase.
In order for your investment to continue to generate the returns you expect, it’s vital you know what the real costs are today and what they are likely to be in the future. You also need to be as sure as you can that the property will retain its intrinsic capital value and rise in price at least in line with the local market average.
As such, here are some key questions you should be asking before committing to buy a leasehold property:
Are there any letting restrictions?
Some leases state that the property cannot be let at all; others might specify that it cannot be let to students, to more than one person or on a short-term basis. So, before making an offer, ask whether there are any of these kinds of restriction and make sure it’s one of the first things your solicitor or conveyancer checks as soon as they have a copy of the lease.
How long is left on the lease?
Once a lease length drops below 85 years, the number of mortgage lenders who will accept it begins to reduce; virtually none will consider fewer than 70 years. So if you are planning to hold the investment for 15-20 years, you must consider how many years will remain when you come to sell.
Extending the lease is usually possible and this may be a money making opportunity if you buy a short lease property with cash, then extend it. However make sure you know how much it would cost and work with an experienced leasehold extension legal company.
What are the ongoing costs and are they reasonable?
The service charge for flats covers buildings insurance and ongoing general building maintenance and should also include a contribution to a ‘sinking fund’ for larger periodical repairs and upgrades, such as roof repairs and painting the exterior of the building. Your solicitor will ask for the management company accounts and should check that all flat owners re paying their service charge on time and in full and that there are sufficient reserves for those larger jobs. If there isn’t very much in reserve, that suggests the service charge might need to be increased in the future and it’s these kind of queries you need to get answered.
Sometimes the accounts and committee meeting paperwork indicate that the property is not being well managed. Ideally, freeholders should use an agent who is a member of ARMA, the leading trade association for residential managing agents in England & Wales. All member agents are compliant, audited, independently regulated, transparent and hold the service charge in trust. Some good news for the future is that all letting agents and property management companies will need to be regulated, hopefully raising standards.
The ground rent is a charge levied by the freeholder and can vary wildly. It’s important to check when and by how much this cost will increase in the future, particularly when it comes to new build flats and houses, many of which are being sold with increasingly onerous terms, commonly that the ground rent will double every ten years. While that might not seem like much of a concern for the initial buyer, when you calculate the cost after the second increase, it can make the property very unappealing to any future prospective buyer. You also need to be aware that if the ground rent is not paid, the freeholder has the contractual right to seize the property.
In addition, if you want to make alterations to the property, you may have to pay a fee to the freeholder, which can run to thousands of pounds for an extension so, again, make sure you are clear on any such fees before you buy.
Can you buy the freehold?
This is particularly important when it comes to leasehold new build houses, because it is becoming more common for the original developer to sell on the freehold to another company, which the property owners may not know anything about until they come to sell.
One purchaser of a Taylor Wimpey home was told, when she bought it in 2015 with 995 years remaining on the lease, that the freehold would cost £2-3,000. When she decided to go ahead with it, just a year later, she was informed that the freehold had been sold to another company and she would have to pay up to £40,000 – almost a third of the property’s value. That has made the house virtually unsaleable, despite the long lease.
If you are buying a new build, it might be wise to consult an legal company independent of the developer to check what your options are and whether anything can be drawn up in writing to agree a freehold purchase price for a certain period of time.
How good is the freeholder at communicating with leaseholders?
By law, freeholders do have to communicate and respond to queries or requests from their leaseholders, but some may have inherited the freehold or bought it without appreciating or understanding their responsibilities.
If there are any issues that cannot be resolved and you feel the freeholder is being unreasonable, it can be a long and complicated redress process. It may therefore be a good idea to try to speak to some of the other leaseholders to find out whether they have had any problems with the freeholder, so you can gauge whether you are likely to run into any challenges.
Where can I turn to for help?
LEASE, the Leasehold Advisory Service, was set up in 1994 to provide information and advice on leasehold law free of charge to the public. All their advisors are legally qualified, independent and impartial. Their website provides the answers to common leasehold queries and you can contact them for a short telephone consultation on your specific issue.
If necessary, your dispute may need to be advanced to the First-tier Tribunal (Property Chamber), the government service that handles applications and appeals.
Finally, take care to engage specialist legal representatives and financial advisers, who are experienced in handling leasehold transactions, such as those members of the Association of Leasehold Enfranchisement Practitioners. If you are buying new build, check that whoever is carrying out the conveyancing has experience in investigating those particular lease terms relating to ground rent, fees for making alterations and purchasing the freehold.
If you require a mortgage, consult an independent broker who is practised in securing mortgages for leasehold properties.
It’s important to remember that most leaseholders don’t experience any significant problems with either their lease or their freeholder. The industry can also be encouraged that the Government is committed to making changes to the law to ensure loopholes are closed and buyers and property owners are protected against unscrupulous practices, so watch this space as it is likely more changes to leasehold are on their way.
This information has been provided by our partner Mortgage Advice Bureau. For more information relating to Mortgages or for Mortgage Advice please visit Mortgage Advice Bureau.